Tuesday, August 17, 2010

China Debt Dumping Continues

Yesterday the banner headline was that China has just surpassed Japan as the second largest economy in the world in terms of GDP. 

The subsequent discussion from this news was how long it would be before China overtakes the United States.  With an annual GDP around $5 trillion, most estimates show at least another 20 years before China catches America's current $15 trillion.

What I found interesting in most estimates I read through was that they did not show the possibility of the US shrinking in size, they only focused on how rapidly China would grow.

America's growth is based on our ability to borrow money.  At some point our foreign lenders will slow down in their willingness to lend.  The important question there is - when?

Yesterday we also received the Treasury International Capital data.  (Also known as TIC flows)  This shows exactly who is purchasing our debt and how much they are buying.  The most recent data was for the month of June and it was surprising to show that China was a net seller of our debt for the second month in a row.

Their holdings fell by $24 billion in June and $32.5 billion in May.  They now own $96.2 billion less of our government debt than they did last July.

Over the years our third largest debt buyer (after China and Japan) has been the oil exporting nations.  They sold off $12 billion in US debt.

Japan was a strong buyer for the month, but without the other big two it raises concerns for our "unlimited" credit card.

Perhaps some of the economic estimates should review this information in before providing 2030 as the year China will surpass the United States.  They need to consider the notion of our GDP shrinking.

The big buyers to fill China's absence were the large commercial banks who have purchased $83 billion in debt since the end of June.  To understand where they got the money, please see United States Debt Default.

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