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Mervin, nobody's a bigger fan of Laissez Faire capitalism than myself. I
truly enjoyed the site, so thanks for pointing it out. However, I can tell
you that the implications they make on EVERY ONE of their charts is absurd.
I'm not a professional economist, but you don't have to be to know they're
just fear-mongering. It would take too long to explain all of the charts,
so I'll just debunk the one you pointed out in particular to make my point.
Let's start by looking at the commentary on the middle of the chart:
Since 1994, currency intervention by Foreign Central Banks (especially the
Central Bank of Japan) has artificially boosted liquidity and has thus
helped pump up further the speculative bubble started by the Fed
This statement is so inaccurate that it makes you wonder if the person who
wrote it has any idea what they're talking about. First, the intervention
by central banks on any currency, whether it's the dollar, the yen, or the
franc, has very little effect on that country's debt and equity market in
the long run. It may boost stock and bond prices for a few days or so, but
in the long run the free market forces of supply and demand will win the day
and the markets will head where these forces say they should head.
Second, the entire topic of currency intervention is meaningless, because
there has been virtually ZERO "currency intervention by Foreign Central
Banks" since 1994. In Japan's case, they (and the Fed) did recently
intervene to prop up the yen. To increase the value of the yen, they bought
yen and sold dollars. This does on the surface sound like an increase in
"US liquidity" (more dollars floating around), but there's one little
problem with that reasoning.
The Bank of Japan holds its dollars in the form of US Treasury Securities.
Therefore, when it wants to sell dollars, it must also sell some of its
Treasury Bills. Do you see where I'm going with this? The chart gives the
impression that the rising holdings of US Securities by foreign banks is
bad, and yet the "currency interventions" it alludes to have the opposite
effect! It makes you wonder why the chart creator even mentions currency
interventions, and if the he or she really knows what they're talking about.
Let's look at the chart itself, and let's assume the numbers given are
accurate (although I'm not sure that they are). At best, the chart is
extremely misleading, and at worst an outright lie. It clearly tries to
give the viewer the impression that the majority of outstanding US Treasury
Securities (which is just a fancy name for US Government bonds) is held by
foreign central banks. Totally untrue. Although the numbers shown might be
right, foreign banks may hold more US bonds than the Fed, they're not the
only bondholders in town.
If this chart was really showing where all the US debt is, it's implying
that the US national debt is only one trillion dollars (assuming the two
lines aren't cumulative, if they are, then the total is $650 billion). I
wouldn't care if foreigners held the entire amount, if the US debt was
"only" one trillion, I'd be jumping up and down right now. A one trillion
debt in an eight trillion dollar economy is peanuts! Unfortunately, the US
national debt is slightly over 5.529 trillion dollars, every penny of which
is in the form of "US Treasury Securities."
Do the math, Mervin. Divide 650 billion (what the chart claims is held by
foreign banks) by 5.529 trillion and you get a little less than 12%. All of
a sudden the debt held by foreigners doesn't look so scary, does it? Are
foreign banks going to "dump" these securities soon? No. These banks are
buying and holding US bonds for very intelligent, rational reasons. Just
one of which is the fact that they have finally come to realize that gold is
a lousy store of value. It's price has been declining for years, and it
doesn't earn any interest. A lot of central banks have therefore begun to
sell their gold holdings and convert the sales proceeds into
interest-bearing instruments, especially US bonds.
Why US bonds? There are many reasons, but the two biggest are that the US
bond market is so big that even large purchases don't bid up the price too
badly. Second, the US has proven itself to be the safest investing
environment in the long run in the world. Would you want to be buying
Indonesian bonds right now? I should also point out that the US Federal
Reserve is also buying foreign securities as well. Is this some sinister
plot to try to create a speculative bubble in foreign stock markets? No,
it's simply called diversification.
Some so-called experts say we should be worried that the Japanese (both
public and private entities) will start selling their US bond holdings and
use the proceeds to help their economic problems. Think about it though,
does that really make any sense? The one VERY bright spot in the Japanese
economy right now is their exports to the US. What do you think would
happen if they sold all of their bonds? First, interest rates here would
rise, and therefore the economy would slow down. A slower economy means
fewer imports, which equals less Japanese exports. The sale would also drop
the value of the dollar, making Japanese products more expensive, which
would result in even less Japanese exports. Saying the Japanese will sell
their US bonds to help their economy reminds me of that statement from a
general in Vietnam, "we destroyed the village in order to save it."
Mervin, there is no speculative bubble, this is nothing like 1929, and
although I may not know about the next 50 years, I can tell you that the US
stock market will continue its phenomenal run for at least the next ten
years. The reasons why are a topic for another day. I hope I've put your
mind at ease.
Bruce
> -----Original Message-----
> From: owner-realtraders@xxxxxxxxxxxxxx
> [mailto:owner-realtraders@xxxxxxxxxxxxxx]On Behalf Of Tin Mervin Yeung
> Sent: Monday, July 06, 1998 3:01 PM
> To: RealTraders Discussion Group
> Subject: foreign holdings of US govt securities
>
>
> Hi, RT's,
>
> Please help me find data to refute the following chart:
> http://www.lfcity.com/chart11.htm
>
> If this chart is true, then we are not going to have a rising stock
> market (+30% annually) for the next 50 years.
>
> Mervin
>
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