Cartoon 673: Indicator

Many people do not realize that the American government borrows significant operating money through Treasury bonds.  The bonds are attractive as a safe haven and foreigners have been more than willing to buy them.  In fact, China is now the largest holder of American debt, followed closely now by Japan.

Treasury bonds have become even more attractive as a result of the financial crisis.  Investors loath to place their money in stocks and other financial vehicles backed by companies with opiate balance sheet losses. They invest in Treasuries even though the interest return on treasury bonds is now zero.

If treasury bonds fail to attract investment the government will have to make them more enticing by raising the interest return. This means greater debt for the government.  Banks will lend if they suddenly decide they absolutely must raise revenue. They will be competing against Treasuries.  Therefore, they will offer a higher rate of return. If investors feel that valuations in the stock market have bottomed out and fly back in, the stock market will take off.  This too would compete against money to be invested in Treasuries. If things appear even worst financially, China and other traditional big buyers of Treasuries might redirect their finances to their own domestic market.

As you can see, there are a lot of “ifs”. It seems pretty certain Treasuries are going to be less attractive. The big question for the oracles is when and to what extent? The answer will indicate America’s place going forward.