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bruceb@xxxxxxxxxxxxx wrote:
>
> 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
>
Your rosey little scenario doesn't put MY mind at ease. There are too
many things that can happen to upset the apple-cart. One thing, for
example involves the value of the U. S. Dollar. You correctly point out
that Japanese exports would be hurt if the dollar's value decreased;
unfortunately for the Japanese, they don't control its value. Further,
if the dollar's value fell enough, Japanese banks would be forced to
sell something(U. S bonds?) because they would not be able to service
their debt. Their business slowdown, as a result of the dollar's decline
would result in even more loan defaults. Let me further assure you that
if selling U. S government securities would save a total banking
collapse from occuring, they would do it in a heartbeat. Worrying about
their precious exports would become a secondary item.
What could cause the dollar to decline? You have to know what gives it
its value before you can answer. Its value is determined SOLELY by our
government's ability to collect taxes - period! If I were the Japanese
right now I'd be worried. We've had a full blown tax revolt in this
country for years and the spectre of government mainframe computers
going bonkers because of the Y2K problem is more than a little
disconcerting. The IRS is not Y2K compliant. Why do you think congress
is moving to eliminate the IRS? Its because its become unable to
collect billions in unpaid taxes and has basically outlived its
usefulness. Congressional hearings on IRS abuses will be the official
reason for eliminating(or at least downsizing)the Agency. Abuses by the
IRS have been known about for years. We didn't need congress to inform
us of this. The Russian citizenry had recently been shooting and
otherwise demonstrating their disapproval of their tax collectors - we
all know what happened to the ruble.
You say the stock market will continue its phenomenal run for at least
the next ten years. I wish I had your crystal ball. It would sure make
trading a lot easier.
Pete
Pete
> > -----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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