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terça-feira, março 17, 2009

That's a lot of T-bills to flog, and the world is taking note !

Wen's Dollar Warning


Chinese Premier Wen Jiabao said Friday that he has "worried" about the
safety of U.S. assets -- meaning the Treasury bonds his government owns.
Whatever Mr. Wen's political motives, his concerns about the integrity of
U.S. sovereign debt are timely and apt.

U.S. debt held by the public has now hit $6.6 trillion -- up from $5.3
trillion only a year ago. That doesn't count the $5.2 trillion or so in
outstanding Fannie Mae and Freddie Mac liabilities that we now know also
have a taxpayer guarantee. And it doesn't count the many ways that both the
U.S. Federal Reserve and Treasury have guaranteed financial assets more
broadly -- such as $29 billion in Bear Stearns paper, $301 billion in dodgy
Citigroup assets, and hundreds of billions in Federal Housing
Administration loans.

President Barack Obama's stimulus plan and new budget will require an
additional $3 trillion to $4 trillion in new borrowing over the next two or
three years, and that's if the economy recovers smartly. Adding it all up,
Federal Reserve Chairman Ben Bernanke earlier this month estimated that
U.S. public debt-to-GDP would reach 60% over the next few years, up from
40% before the financial panic hit -- and the highest level since the
aftermath of World War II.

That's a lot of T-bills to flog, and the world is taking note. Our
colleagues at MarketWatch reported last week that the cost to buy insurance
against U.S. sovereign debt default has surged in the past year. The
spreads on credit default swaps for U.S. government debt hit 97 basis
points last week -- or $97,000 to buy insurance on $10 million in debt --
nearly seven times higher than a year ago and 60% higher than the end of

Mr. Wen called on the U.S. to "maintain its credibility, honor its
commitments and guarantee the safety of Chinese assets." Little wonder:
China, like other trading nations, has a big stake in this fiscal
free-for-all. Although it doesn't release detailed data, roughly two-thirds
of Beijing's $1.9 trillion foreign-exchange reserves are likely parked in
U.S. Treasury debt.

The Obama Administration revealed its sensitivity on the issue by
responding quickly, with Presidential spokesman Robert Gibbs saying Friday
"there's no safer investment in the world than in the United States." Mr.
Obama added Saturday that "not just the Chinese government, but every
investor can have absolute confidence in the soundness of investments in
the United States."

The White House is almost certainly right that the U.S. won't default; the
consequences would be too dire. But there are risks well short of formal
debt repudiation. As the supply of U.S. debt increases, investors may
demand a higher yield and interest rates would rise, reducing the tradable
value of current Treasury bonds. The other temptation will be to inflate
away the debt, which would also devalue dollar-denominated assets.

What Mr. Wen is really saying is that even the U.S. national balance sheet
has limits. The dollar is the world's reserve currency, so the U.S. has the
rare privilege among nations of being able to borrow (and then repay its
debts) in its own currency. America also remains the world's main safe
haven in a crisis, as the flight to the dollar and T-bills in recent months

But reserve currency status isn't a birthright and it can vanish when
nations are irresponsible for too long. Deficit spending has its uses when
the money is spent on winning a war or to finance tax cuts and investments
that promote economic growth. The tragedy of Mr. Obama's $787 billion
"stimulus" and his $410 billion 2009 spending blowout is that they spend
principally on income maintenance and transfer payments that have little or
no growth payback.

Mr. Wen may have been trying to placate his domestic Chinese audience,
which is suffering through its own economic slowdown. Or perhaps he was
trying to repay Treasury Secretary Timothy Geithner for his
nomination-hearing comments on Chinese currency "manipulation." Mr. Wen
doesn't have much room to lecture the U.S., having done too little in his
six years in office to liberalize the Chinese economy.

But the Chinese Premier is right to warn the U.S. political class that the
global demand for American debt will continue only if the U.S. runs
economic policies that make U.S.-dollar assets worth the risk.


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