From the end of March through June, foreigners dumped $124 billion of U.S. treasuries after increasing assets for 15 months straight, according to data compiled by the U.S. Department of Treasury.
In fact, these three months mark the largest drop in foreign holdings of treasuries on record, detailed monthly Treasury data going back to the year 2000 reveals.
In 2000, foreigners held $1 trillion of U.S. treasuries, and today hold $5.6 trillion. What could explain the sudden drop off after more than a decade of record purchases?
Is this just some temporary profit-taking, or has the U.S. treasuries bubble finally popped? And what might that mean going forward?
One reason for the selloff may be that foreign countries, particularly in developing economies, is that inflation and interest rates are soaring. As noted by the UK Telegraph’s Ambrose Evans Pritchard: “A string of countries have been burning foreign reserves to defend exchange rates, with holdings down 8pc in Ecuador, 6pc in Kazakhstan and Kuwait, and 5.5pc in Indonesia in July alone. Turkey’s reserves have dropped 15pc this year.”
In short, emerging economies are slowing down, and so no longer have the excess cash to buy up treasuries, and in fact, are becoming net sellers.
During the same period of the end of March through June, the U.S. Federal Reserve loaded up on $148 billion of treasuries, offsetting the foreign selloff.
As a recent U.S. Monetary Policy Forum study noted: “[T]he large scale purchases by the Federal Reserve may be one factor that has helped keep interest rates down up to this point.”
But with quantitative easing expected to begin tapering down in the coming months, if new treasuries purchases were to suddenly stop, interest rates for government debt sold on the market would likely have to rise to attract buyers. And if the bonds keep getting dumped overseas, interest rates could rise dramatically in the U.S.
Already interest rates on 10-year treasuries have jumped from about 1.6 percent in May to about 2.9 percent today, nearly doubling.
For every point of increased interest, taxpayers can up to owe another $168 billion of interest payments on the $16.8 trillion national debt.
If rates get too high, it could set off a funding crisis and imperil the dollar’s status as the world’s reserve currency.
By 2022, the national debt will likely total $25 trillion based on projections by the Office of Management and Budget. If interest rates were to normalize to their historical average of about 5 percent, interest owed will total $1.25 trillion a year.
The future growth of debt is already baked into the cake. Unless the baseline, particularly on mandatory spending, is moved downward, 30 years from now we are going to be in serious trouble. There is no way economic growth will be able to keep up.
The debt, which was $16.432 trillion at the beginning of the year, if it continues growing at an average 7 percent rate annually like it did the last 60 years, by 2042, will be $125.08 trillion.
Interest payments at 5 percent would then total $6.25 trillion — every single year.
But, we probably won’t even get that far. A funding crisis will eventually ensue in the future, and if the foreign selloff of treasuries is any indication, it might be much sooner than anyone thinks. In the meantime, it may mean that the Fed’s plans of tapering may be postponed — indefinitely.
Robert Romano is the senior editor of Americans for Limited Government.
