September 30, 2013

Debt Doomsday: The Wrongest Prediction of Our Time?

Well, it's happened. The oft-trumpeted Day of Doom, when China sells US Treasury Bonds, has arrived.

(Reuters) - China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries. 
The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June, a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday. 
China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows.
As of now, after 5 months of foreign selling of US Treasuries, that 10-yr Treasury yield is....around 2.6% at the moment I'm writing this.

So...where's the panic?  Weren't we supposed to see people jumping from buildings?

Or at least weren't we suppose to see a debt interest catastrophe, with the interest rate climbing and climbing, and the nation's finances in trouble?

Do you realize how low 2.6% is?  It is still far below normal levels.  Normal would be more like 4% to 5%.

Interest rates will go up and down.  They could be up or down this week, or month.  It tells us nothing, unless they rise above normal levels of about 5%.

If 10-yr rates are 3%, that is low.  If they are 3.5%, that is low.  If they are 2.6%, they are very low.

Now, as this endlessly predicted time of doom hasn't amounted to much, we will now hear acknowledgement of the complete falsehood of the popular hypothesis that we are profoundly dependent on China to finance our debt....?

But the non-crisis of debt is no surprise for those that read this blog a couple of years back.

As I wrote in June 2011:
But this [interest rate catastrophe theory] is wrong, illusory, for a pragmatic reason. 
Because the worldwide savings glut, which makes US treasury interest rates on our national debt so low, isn't going away, not for decades.
I'd love to see an objective process on the part of those making the interest-rate-disaster prediction, admitting the data is showing their assertion/hypothesis was wrong.

Will that happen?

Perhaps not.  But in the meantime, we live in the world I described.

The world where there are a lot more big savers than big spenders.

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