China selling U.S. Treasuries

I should have added to my earlier post on the devaluation that China is not selling gold reserves to underwrite its economic losses.  It is selling U.S Treasuries.  This is something that is being underplayed at the moment and should be receiving considerably more attention, particularly in the context of the devaluation.  Over the last five quarters, China has sold $520 billion of its forex reserves most of that in the form of U.S. Treasuries.  This retreat on China’s part will have ramifications in the United States with respect to the Fed policy and the dollar’s future purchasing power.  From a Barron’s piece by Randall Forsythe,

“As for the present conundrum, there’s an $800 billion gap between the $1.1 trillion the Treasury is borrowing to cover the budget gap and the roughly $300 billion overseas investors are buying, [MarketMavens’ Stephanie] Pomboy calculates. Banks, corporations and households have been doing little to fill that gap, preferring higher-yielding securities, so ‘it would appear the heavy lifting has been done by long-only bond managers extending duration and specs rushing to cover their shorts,’ she writes.

But Pomboy has little doubt that the Fed will step in to fill the gap left by others. In other words, debt monetization, a fancy term for printing money to cover the government’s debts, which in polite circles these days is called ‘quantitative easing.'”

Yesterday, Alan Greenspan issued a warning about bond market liquidity.  “We have a pending bond market bubble,” he says.  By the way, to put that $520 billion in context, for a mere $111 billion China could have purchased the total global mine production of gold (3133 tonnes) for 2014.  Numbers like that also provide insight into gold’s historic undervaluation at this juncture.