The next time Congress wants to raise a $700 billion bailout fund or put together a new package to help a firm like AIG (AIG), Washington is going to have to call Beijing.
As the budget deficit grows each year and is likely to expand at a more rapid rate during a recession as receipts fall and the need for a social safety net rises, the Treasury is going to have to get deeper and deeper into the money printing business.
According to Bloomberg, "China surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries, as foreign investors sought the relative safety of government debt as stocks plunged 9.1 percent that month." China’s ownership position is now about $600 billion.
While it is nice that China continues to buy up the paper, since the mainland’s own economy may move into a recession, it raises the question of how long the central government can continue to be a net buyer at current levels.
Raising money for the US federal government could be a lot more difficult in six months or so.
Douglas A. McIntyre