Yesterday’s $15bn 5-year Treasury note auction drew a record high 65% participation of indirect bidders, usually regarded as proxies for foreign central banks. While the bond market rose in response to this “good news,” the reality is that increased dependence on foreign central banks can hardly be welcomed as a positive development, and is symptomatic of a savings-short society consuming well beyond its means.
The record high level of foreign central bank participation temporally alleviated growing anxiety concerning their willingness to keep buying. However, while yesterday’s auction may have suspended fears that America’s day of reckoning is imminent, its eventuality is nevertheless inevitable. The unfortunate reality is that the longer it takes to arrive, the worse financial and industrial shape America will be in when it does.
Increased foreign ownership of U.S. debt directly increases future current account deficits as higher interest payments abroad become necessary to service growing external liabilities. In addition, by artificially propping up the dollar and suppressing U.S. interest rates, foreign central banks merely provide American consumers with additional rope with which to hang themselves. Buying more subsidized imported products puts additional upward pressure on the trade deficit, while borrowing from abroad to pay for them puts additional IOU’s in foreign pockets, exerting still more upward pressure on the current account deficit.
For America, the longer foreign central banks keep lending, the deeper the hole it is digging for itself gets. For foreign central banks, the more good money they throw after bad, the bigger their losses will be when they ultimately bite the bullet. Unfortunately for America, it is the bullet!