Monday, March 22, 2010

China's Deficit May Uncover The Direct Bidder

The global economy that we have known for the past 30 years has been a similar theme.  The United States has been the global consumer of the goods the world produces.

The largest producer of those goods over the past decade has been China.

This imbalance between the two countries created a large trade surplus for China and a large trade deficit for the United States.  (The US bought more than they sold.  The difference is a deficit)

This meant that China had a large amount of cash coming in month after month.  If that cash was kept on their shores and converted into yuan currency it would have caused high levels of inflation within China. 

Instead, they immediately took that money and recycled it back into American assets.  The bulk of the purchases were in US treasury bonds which has allowed the United States to run incredibly high deficits year after year.

Why is this important?

This morning the China Daily News is reporting that China plans on announcing a deficit of $8 billion for the month of March.  You read that correctly; deficit. 

Our government this year needs to raise an estimated $1.4 trillion in the debt markets to remain solvent.  Over the past four months there has been a mysterious direct bidder at the weekly auctions who many have speculated was China making purchases through the United Kingdom.

This news of a monthly deficit makes that scenario very unlikely.

That leaves one big buyer still out in the market place.  I think you know his name by now:


No comments:

Post a Comment