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April 05, 2005

Bush assures foreign investors: "It's just paper!"

Given that we rely on foreign holders on U.S. Treasuty notes for almost $2 trillion dollars of the $7 trillion public debt Bush has run up:

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
(in billions of dollars)
Japan 701.6
Mainland China 194.5
United Kingdom 163.0
Caribbean Banking Centers 92.5
Korea 67.7
OPEC 64.7
Grand Totals 1960.3

And given that lack of confidence by foreign investors in U.S. treasury notes is one of the leading causes for concern about the decline of the dollar:

And the foreign holders of all those bonds are listening to our debate. They are listening to a country that is refusing to raise taxes, and an administration talking about borrowing an additional $2 trillion so Americans can invest some of their Social Security money in stocks. If that happened, it would almost certainly weaken the dollar, further depreciating the U.S. Treasury bonds held by all those foreigners.

On Monday, the Bank of Korea said it planned to diversify more of its reserves into nondollar assets, after years of holding too many low-yielding and depreciating U.S. government securities. The fear that this could become a trend sparked a major sell-off in U.S. equity markets on Tuesday. To calm the markets, the Koreans said the next day that they had no intention of selling their dollars.

Oh, good. Now I'm relieved. "These countries don't have to dump dollars - they just have to reduce their purchases of them for the dollar to be severely affected," Mr. Hormats noted. "Korea is the fourth-largest holder of dollar reserves. ... You don't want others to see them diversifying and say, 'We'd better do that, too, so that we're not the last ones out.' Remember, the October 1987 stock market crash began with a currency crisis."

Clearly, there was only one option for winning back some confidence in U.S. Treasury bonds:

President Bush sought to dramatize Social Security's solvency problems Tuesday by pointing to government IOUs stored in a file cabinet that are supposed to finance America's future retirement needs.

"A lot of people in America think there is a trust that we take your money in payroll taxes and then we hold it for you and then when you retire, we give it back to you," Bush said in a speech at the University of West Virginia at Parkersburg.

"But that's not the way it works," Bush said. "There is no trust `fund' just IOUs that I saw firsthand," Bush said.

Earlier, Susan Chapman of the Office of Public Debt Accounting had shown Bush an ivory four-drawer filing cabinet with numeric locks. "This is it," she said.

"This is what exists," Bush said, illustrating his point that the promise of future Social Security benefits are simply stashed in a file.

Chapman opened the second drawer and pulled out a white notebook filled with pseudo Treasury securities pieces of paper that offer physical evidence of $1.7 trillion in treasury bonds that make up the trust fund.

The pieces of paper he saw are not real Treasury securities. In today's computer age, investors no longer get honest-to-goodness Treasury bonds they can hold in their hands. But, by law, the bureau creates paper bonds to put in the file cabinet just in case anybody, like Bush, wants to see the trust fund.

"Imagine," Bush said in his speech. "The retirement security for future generations is sitting in a filing cabinet. It's time to strengthen and modernize Social Security for future generations with growing assets that you can control that you call your own assets that the government can't take away."

Posted by Mike at April 5, 2005 06:23 PM

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