Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

Warning Bell? China May Stop Buying US Debt

  by    0   2

Ding.

They say bells never ring when markets hit the top. But maybe they do and people just don’t listen.

Yesterday, Bloomberg reported China may slow or even stop its purchase of US Treasuries. In other words, a major source of US government debt financing may be pulling out. This comes at the same time the Federal Reserve has committed to shrinking its balance sheet. 

“The Chinese are applying pressure to the Treasury market just as the (Federal Reserve) is about to step away from being the buyer of last resort,” FX strategy at BK Asset Management managing director Boris Schlossberg told Bloomberg.

So could this be a ringing bell?

In his latest podcast, Peter Schiff called it “an ominous sign.”

A. China is the largest buyer and owner of US Treasuries in the world. But B. we just cut taxes. We cut taxes and not spending, so we are financing these tax cuts by borrowing more money, by running bigger deficits, by selling more bonds. And if the largest buyer and owner of those bonds is saying, ‘No más,’ well then that is a big problem. Because who is going to step up and replace the Chinese?”

Peter made went on to make an interesting point – who would even want to buy US Treasuries at this point? Even if you aren’t an economic doom-and-gloomer, the current bond market and historic bond prices don’t make them particularly desirable assets.

Aren’t there other assets you would rather own than extremely low-yielding US Treasury bonds? So, if the Chinese don’t want to buy, it stands to reason a lot of other people don’t want to buy either. Especially if they know the Chinese are not buying.”

This raises another question. If the Chinese stop buying US Treasuries, will they start selling what they have? The fact that they don’t want to buy would seem to indicate they are bearish on US debt. It wouldn’t be unreasonable to think the next step might be to sell. Or China could follow the Fed’s strategy and simply let their bonds mature, decline to roll them over, and ask for their money back.

Where is the US Treasury going to get China’s money back if China’s not going to loan it to them again? If the Federal Reserve isn’t loaning it again? Where are they going to get the money? They can’t. That is the problem. You know, it’s amazing how few people are worried about a problem so potentially ominous as this one.”

What was the 2008 financial crisis all about?

Too much debt.

People took out too much debt and put it into real estate. When the market crashed, the house of cards came tumbling down.

What do we have today?

Too much debt.

Interest rates were key to the 2008 crisis and they will play a key role again. In the years leading up to the financial crisis, a lot of people bought houses they couldn’t afford. But because they got low-interest teaser rates that kept payments low, they bought in, thinking the increase in the value of the home would allow them to refinance or sell when the teaser rate expired and the payment went up. When the bubble burst, people were left holding the bag. Fast forward to today.

The United State Treasury has a teaser rate on a $21 trillion national debt, and what the Chinese are saying with this bell that they’re ringing is this teaser rate may be expiring soon and interest rates may be going back to normal.”

In fact, rates could go beyond normal. After all, pendulums swing both ways. Since we’ve had historically low rates for years, it could go the other way to historically high rates.

All of this has huge ramifications for the American economy. Even normalized interest rates would crush the US budget under interest payments. Analysts have calculated that if the interest rate on Treasury debt stood at 6.2% – their level in 2000 – the annual interest payment on the current debt would nearly triple to $1.3 trillion annually.

The people who are ignoring this problem – they have to assume that interest rates will never normalize – that these ridiculously low interest rates that we have are going to stay here forever. Now, that seems to be a crazy assumption. What’s more crazy? To assume that interest rates will eventually go back to normal? Or to assume that they’re never going to go back to normal?”

You have to believe rates will never go back up to believe we are not heading for a major economic crisis. The fact is, the federal government cannot afford to pay the interest on its debt in a high-rate environment. Something has to give.

Is that the sound of bells I hear?

Get Peter Schiff’s most important Gold headlines once per week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

ETF Gold Holdings Hit Another Record High

Gold continued to flow into ETFs after breaking a record in September. Gold-backed funds took in another 44.4 tons of metal in October, pushing global holdings to another record of 2,900 tons, according to the latest data by the World Gold Council. The previous record for ETF gold holdings was set back in 2012 when […]

READ MORE →

Consumer Debt Sets Another Record But Borrowing Pace Slowing

Consumer debt set another record in September, but the pace of borrowing appears to be slowing. This could signal trouble for an economy built on American consumers spending money they don’t have. Total consumer debt grew by $9.5 billion in September, according to the most recent data released by the Federal Reserve. That represents an […]

READ MORE →

The Federal Government Spending Is Even Worse Than Advertised

Uncle Sam is spending money far faster than he’s taking in. The US federal government ran the biggest budget deficit in seven years in fiscal 2019, according to the Treasury Department. And the spending is even worse than advertised. The $984 billion deficit amounts to 4.7 percent of GDP. That’s the highest percentage since 2012. […]

READ MORE →

Gold Demand Up 3% in the Third Quarter

gold coins and bullions laying on a newspaperGold demand was up 3% in the third quarter, coming in at 1,107. 9 tons, according to the Gold Demand Trends Q3 2019 report put out by the World Gold Council. Record inflows of gold into ETFs overcame weakness in the jewelry, and gold bar and coin markets to push overall demand higher. Gold mine […]

READ MORE →

Central Bank Gold-Buying Spree Shows No Sign of Letting Up

The central bank gold-buying spree shows no sign of letting up as countries seek to diversify their reserves away from the US dollar. Globally, central banks added another net 47.5 tons of gold to their reserves in September, according to the latest data from the World Gold Council. There were no significant gold sales by […]

READ MORE →

Comments are closed.

Call Now