■"Bearish on Uncle Sam? As Foreign Investment Shows Decline, Economists Keep Watch," by Jonathan Weisman and Ben White, Washington Post, 19 October 2004, p. E1.
Here's a compelling scene that should send chills down your back:
On Sept. 9, as it must frequently do, the U.S. government turned to Wall Street to raise a little cash, and Paul Calvetti bet that demand for $9 billion worth of long-term Treasury bonds would be "huge."
But at 1 p.m., as the auction opened and the numbers began streaming across his flat-panel screens, the head of Treasury trading at Barclay's Capital Inc. slumped in his chair. Foreign investors, who had been voraciously buying Treasury bonds, failed to show up. Bond prices cascaded downward, interest rates rose, and in five minutes, Calvetti, 38, who makes money by bidding on bonds at one price and hoping market demand lets him quickly resell them at a profit, had lost $1.5 million.
"It's amazing," he gasped, after the Treasury Department announced that Wall Street traders, not foreigners, had been left to buy virtually the entire auction. "I don't think I've ever seen this before."
Now, you might first be asking yourself if it isn't amazing that Barclay's basically employs this guy to do day trading on bonds, but that's a separate blog for another day.
The real point is, as the story claims, "a portentous issue." Foreigners hold about half of the outstanding Treasurys right now, or almost $2 trillion, so any turn in sentiment overseas against betting on America's long-term future (and don't bet that doesn't include a sense of our security role in the world!) could ripple through our economic well-being like a hot knife through butter. Last years foreigners bought only $17B in Treasurys, compared to $30B the 12 months before that. Meanwhile, we go on running up the deficit and funding a major effort in Iraq like there's no tomorrow.
The big fear here is that Japan and China will start holding more reserves in Euros, which look more stable vis-à-vis the dollar as time goes by. Chinese holdings of Treasurys have tripled in this decade, but don't expect that trend to continue forever, as they've already started diverting more and more profits to Euros. Ditto for India.
Larry Summers, former Secretary of Treasury, calls is "a kind of global balance of financial terror." He thinks it's odd we're the biggest military power and the biggest debtor in the system, but he shouldn't be surprised. It's an essential transaction we conduct with the outside world, but especially with the rising economies of the New Core.
And guess what? If they don't like what they're buying in terms of global security, they'll take their money somewhere else.
You can call it all "confidence in U.S. markets," but I call it the military-market nexus.
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