Is the U.S. on the Verge of an Economic Collapse?
Foreign governments are accelerating sales of U.S. debt they hold, a fresh signal that a U.S. economic collapse is coming soon. Foreign holdings of U.S. Treasury debt and other notes have dropped to $6.18 trillion in January 2016, down from $6.22 trillion in January 2015.
According to figures released this week, foreign central banks and government institutions sold $57.2 billion of U.S. Treasury debt and other notes in January, up from $48.0 billion in December. That is the highest monthly tally on record, with said records going back to 1978. Last year, foreign central banks dumped a record $225.0 billion of U.S. debt. (Source: “Foreign governments dump U.S. debt at record rate,” CNN Money, March 17, 2016.)
Foreign governments are selling their U.S. holdings mainly because they are raising cash to stimulate their own economies in the wake of the global growth slowdown and the continuing crash in oil prices.
China, the largest owner of U.S. debt, trimmed its Treasury holdings by $8.2 billion to $1,237.9 billion in January from $1,246.1 billion in December, according to the Treasury Department figures. The world’s second-largest economy has been liquidating its holdings of foreign debt to pump money into its slowing economy, plummeting currency and extremely volatile stock market. (Source: “Major Foreign Holders of Treasury Securities,” U.S. Department of the Treasury web site, last accessed March 18, 2016.)
Norway lowered its holdings from $69.1 billion in December to $68.1 billion in January and Mexico dropped its U.S. holdings to $69.9 billion in the first month of this year from $72.2 billion in the last month of last year. Canada and Colombia also cut their Treasury holdings in January.
All four of these countries are exposed to the oil price crash and needed the cash to fill big holes in their budget. Oil had reached $26.00 per barrel in January, the cheapest price in several years.
Some analysts, who believe that a U.S. economic collapse is not approaching, argue that foreign governments still have confidence in the world’s largest economy. “These foreign sales are not fundamentally driven. The U.S. economy seems to be on better footing,” said Sharon Stark, fixed income strategist at D.A. Davidson. (Source: “Foreign governments dump U.S. debt at record rate,” CNN Money, March 17, 2016.)
Month-over-month, total foreign holdings of U.S. debt rose in January to $6.18 trillion, from $6.18 billion in December. Bullish analysts believe that this is because demand from global investors continues to be high. In addition, some foreign governments added to their piles of Treasury bonds, including Japan, Brazil and Belgium.
Bulls argue that the U.S. can borrow money at a lower rate now than at the beginning of the year (the benchmark 10-year Treasury yield is sitting at 1.99%; that’s down from nearly three percent two years ago). They believe that no U.S. economic collapse could be on the horizon simply because the demand for U.S. Treasury bonds and other notes is driven by the relative strength of the U.S. economy, which continues to add jobs at a healthy pace despite the global headwinds.
“Treasuries are the best kind of collateral out there. The U.S. still engenders the most confidence over the next 10 years relative to other economies,” said Nicholas Colas, chief market strategist at ConvergEx. (Source: Ibid.)