The Federal Reserve Now Owns $2.4 Trillion In U.S. Treasuries & China $1.2 Trillion What Happens Whe

The Federal Reserve Now Owns $2.4 Trillion In U.S. Treasuries & China $1.2 Trillion What Happens When They Stop Buying?

By: Louis Cammarosano May 25 2014

Foreign Holdings of U.S. Treasuries Here is a list of the largest foreign holders of U.S. Treasuries as of March 2014 (click to enlarge): Why Foreign Nations Hold U.S. Treasuries The United States dollar became the world’s reserve currency in 1944 towards the end of World War II. For a short history of the Bretton Woods Agreement of 1944 that established the gold standard that would back the dollar as the world’s reserve currency and the subsequent removal of the gold standard in 1971 and the creation of the “petro dollar” that maintained the dollar’s world reserve currency status,

Because the U.S. dollar is the world’s reserve currency, demand for dollars remains strong as countries hold dollars in reserve to buy oil, settle international trades and to hold as their nations’ savings. These dollar reserves are held in the form of U.S. Treasury bonds (T Bonds).

The United States is able to incur massive deficits funded in part by foreign purchases of U.S. debt and more recently and increasingly through the Federal Reserve’s (the Fed) purchases of T Bonds as part of their multi-year/multi trillion dollar quantitative easing (QE) program whereby they print dollars out of thin air to buy them.

As a result of QE more than a few nations, notably Iran, Russia, China and Brazil have become increasingly concerned that the value of their T Bond holdings are being diluted by the Fed’s massive money printing campaign and have made efforts to reduce their need to hold dollars for settling their trade accounts. Last October, China called for the world to “de-Americanize” because “the destinies of others are in the hands of a hypocritical nation that have to be terminated”.

Such calls to “de-dollarize” have increased and been joined by Russia as the west battles Russia’s designs on Crimea and Ukraine with economic sanctions. Most recently, Russia and China signed a 30 year gas deal that supposedly does not involve dollars for payment.

China’s U.S. Treasury Holdings For the past ten years or so as Chinese exports to the United States have boomed, China has steadily increased its U.S. Treasury holdings to become the largest U.S. holder surpassing Japan. China’s willingness to purchase U.S. Treasuries for their reserves has allowed the United States to increase its deficits and to fund its liabilities.

In the past two years, China has been talking about reducing the pace of its purchases of T-Bonds and eventually reducing their holdings. As of March 2014, China held $1.272 billion of T bonds, about the same amount it held a year ago (see chart of below).

China, however, has been diversifying its reserves and notably increasing their gold reserves. (see gold charts below) Russia’s U.S. Treasury Holdings Russia has historically held T-Bonds, but in small amounts ($153 billion as of March 2013). Russia had publically threatened to dump its T-bonds in retailiation for sanctions imposed on it by the U.S. and it appears to have begun to do so. As of March 2014, Russia held just $100 billion worth of T-Bonds.

Russia, like China has been increasing its gold reserves steadily. (see gold charts below) Belgium’s U.S Treasury Holdings Belgium is now the third largest foreign holder of U.S. Treasuries Other than Russia’s reduction of its T-Bond holdings, the only other significant change in foreign holdings of U.S Treasuries is the dramatic increase in Belgium’s holdings in recent months. Belgium held $188 billion of T Bonds in March 2013, $200 billion in November 2013, $257 billion in December of 2013 and $381 billion by March of 2014.

There has been much speculation as to why Belgium has emerged as the third largest holder of U.S. Treasuries. Belgium’s massive increase has coincided with the Fed’s tapering of QE in December 2013 and with Russia’s selling of its T-Bonds.

Belgium’s purchases of about $200 billion worth of T-Bonds since October 2013 don’t square for a country with a trade deficit and GDP of around just $400 billion, leading some commentators to question where is Belgium getting the money to make the purchases? We have suggested that the U.S. has “requested” that Europe, perhaps through Belgium, purchase additional U.S. Treasuries in exchange for continued NATO military support as a form of Marshall Plan in reverse.

The Federal Reserve’s Holdings of U.S. Treasuries In the past few years the Fed has been purchasing between 60 and 90% of the newly issued treasuries as part of their QE program. The Fed buys U.S. Treasuries by printing the dollars needed to purchase them. Listen here to Ben Bernanke in 2009 explaining the rationale behind the dollar printing process and when it will stop.

The Fed now holds nearly $2.4 trillion T-Bonds, or about two times as many as China! Since the Fed has essentially become the T-Bond market over the past few years via QE, the question remains, who will buy T-Bonds that the Fed will not buy as it ends QE in the amounts necessary to keep interest rates low? As incredulous as it may seem, it appears that tiny Belgium has taken up that monumental task.

Chart showing that the Federal Reserve has accumulated $2.4 trillion in U.S. treasuries The Federal Reserve now holds nearly $2.4 trillion in U.S. Treasuries Foreigners Diversifying and Moving Their Reserves from U.S. Treasuries To Gold The movement away from the dollar appears to have begun. As recently as May 2013, the percentage of foreign exchange transactions conducted in dollars was 80% and the percentage of overseas reserves held in dollars was 60%. As countries sign more non dollar deals among themselves and diversify their reserves, these percentages will certainly fall.

China’s Gold Reserve’s Earlier this month we reported that China had become the world’s largest gold importer and gold producer.

Set forth below are charts that show how China has been satisfying its thirst for gold.

China’s Gold Imports through Hong Kong Chinese gold imports through Hong Kong Russia’s Gold Reserves Russia has been increasing its gold reserves steadily as it diversifies away from the dollar. russian central bank gold reserves through april 2014 Top Twenty Gold Holders China and Russia (but not Belgium) are now in top twenty gold holding countries: Gold Reserves by Country- Top 20. Russia and China Have Increased Their Gold Reserves And Are Now In The Top Top 10.

Russia and China Have Increased Their Gold Reserves And Are Now In The Top 10.

The Federal Reserve’s Gold Holdings According to the Fed itself, it holds no gold on its own behalf, but acts as custodian for other countries’ gold. Recently there has been some speculation that the Fed does not have the gold it claims to hold on behalf of other countries. For example, in January 2013, Germany requested the repatriation of a portion of its gold held by the Fed and their request was meet with an initial denial and a promise to return only some of the requested amount over seven years. Slowly, Germany’s gold appears to be making it back.

The United States Treasury supposedly holds most of the world’s gold, a good portion of it at Fort Knox, although an audit of that gold has not been held since the 1950′s. Former Congressman Ron Paul’s 2011 request to audit Fort Knox remains unanswered.

Impact of Reduced Demand for Dollars The United States has enjoyed a high standard of living partially because it can fund its deficit spending via the sale of T-Bonds to foreigners or through the printing of money via the Federal Reserve’s QE programs. If the demand for dollars is reduced as the Fed tapers and ends QE and countries use currencies other than the dollar in international trade and reduce their dollar reserves, the value of the dollar will decline making imports to the U.S. more expensive and causing price inflation in the United States.

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