Who holds our IOUs?

As the Bush administration prepares to sink another $87 billion into Iraq (merely a down-payment on projected costs of the open-ended occupation) and quietly prepares for annual deficits surpassing $500 billion, Americans may ask themselves: Who holds the federal government's IOUs? An important clue was offered by Treasury Secretary John W. Snow's recent itinerary, which took him to Beijing and other Asian capitals.

Foreign investors own between one-fifth and one-quarter of the U.S. government's debt, with Asian investors owning the greatest share. The August 4th Wall Street Journal reported: "At the end of May, Japan was the largest foreign owner of Treasurys with a holding of $429 billion. That position reflects the investment of dollars obtained from Japan's $27 billion trade surplus with the U.S.... But gaining fast is China, which has surpassed Japan in terms of having the largest trade surplus with the U.S. at $44 billion. Chinese investors have the second-largest foreign holdings of Treasurys at $122 billion, more than double the amount that nation held in 2000."

"It has been widely reported that the U.S. must take in about $1.3 billion a day--about $55 million an hour--in foreign investment to finance its overseas debt," reported the July 15th Asia Times. "If that river of money falters or dries up, the difference must be made up by an inexorable fall in the value of the U.S. currency. Indeed, if it had stopped already, the fall in the U.S. stock market ... would have been catastrophic."

That catastrophe may be nigh on arrival. In recent months, "as investors have become more optimistic about economic recovery, they have begun to sell Treasury debt, sending government bond prices down," notes the September 7th Financial Times. "If Asian countries were to reduce their holdings of American assets heavily, they would remove a key source of finance for U.S. investment spending."

The Financial Times reported fears among economic analysts that "Asian investors, who are the largest foreign owners of U.S. Treasuries, may cut their holdings of U.S. government debt, withdrawing a key source of financing for America's large current account deficit. The worries have been fuelled by recent sharp falls in the price of U.S. government debt." One potent indicator of impending trouble is a lack of foreign interest in buying recent bonds issued by federally chartered mortgage companies Freddie Mac and Fannie Mae, which have issued more than $1.5 trillion in housing loans and are mired in Enron-style accounting and oversight scandals.

Christopher Wood of Credit Lyonnais Securities Asia warns that as U.S. government debt and the trade deficit continue to mount, and Asian investors become less interested in buyiug Treasurys, the stage is being set for a "truly massive devaluation of the dollar." "The view here [in Hong Kong] is that the U.S. dollar will have disintegrated by the end of this decade," states Wood.

Holding the key: Treasury Secretary John W. Snow shakes hands with an official from the Chinese finance ministry. Foreign investment in the U.S. is deemed necessary to finance America's debt, with China rising fast on the list of top investors.

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