Thursday, April 14, 2011
Who will buy the treasuries?
My morning commute seems to be the only time I have available to let my mind wander. Today I was thinking about the proposed end of quantitative easing 2 and its potential impact. Though I am not an economist I do play one on the Internet, so keep that in mind and tell me if you find some flaws in my thinking. Just to recap, quantitative easing is essentially the method the federal reserve is using to buy various assets from mortgage backed securities to federal treasuries using newly created money (the so called printing press). In regards to the later, this has really changed treasury buying. Not too long ago the federal reserve bought about 10% of the treasuries, foreign investors 50% and US investors 40%. Now the fed purchases about 70%, foreign investors 30% and US investors a small fractional amount. So if the federal reserve ends QE2, who will buy the new treasuries? If memory serves me correct Japan is the 2nd biggest buyer of treasuries. But with the problems they are facing, I doubt they would increase there purchases. So I guess that leaves China, Korea, and US investors as the predominant buyers. But to entice these buyers, the interest these investments pay would have to go up. An increase in the interest rates would have a bad effect on the federal government as more of the budget would have go towards interest payments. On the other hand, if the fed continues the QE the newly created money which will enter the system via the federal government will eventually cause inflation. This is already a major concern for Americans. Just look at the price of gold and silver. Also, continued QE would discourage foreign investors from buying treasuries since they would view it as further erosion of the dollar. So it seems like we are in a real catch 22. Maybe there is a light at the end of the tunnel, but we are just to far away to see it.