Why Is Japan Selling US Treasuries?

Next to China, Japan is the biggest holder of US debt. And Japan is having second thoughts. Why is Japan selling US treasuries? Bloomberg writes that America’s biggest creditors are dumping treasuries as a warning to Trump.

In the age of Trump, America’s biggest foreign creditors are suddenly having second thoughts about financing the U.S. government.

In Japan, the largest holder of Treasuries, investors culled their stakes in December by the most in almost four years, the Ministry of Finance’s most recent figures show. What’s striking is the selling has persisted at a time when going abroad has rarely been so attractive. And it’s not just the Japanese. Across the world, foreigners are pulling back from U.S. debt like never before.

From Tokyo to Beijing and London, the consensus is clear: few overseas investors want to step into the $13.9 trillion U.S. Treasury market right now.

The prospect of more deficit spending in the USA is part of this as is the odds that interest rates will be going up making current holding less valuable. The chaos that is the Trump administration has rattled investors and that is why Japan and others are selling U.S. treasuries. How quickly might this change the U.S. debt market? Back in 2008 fifty-six percent of US debt was held by foreigners and today that number is 43%. The problem for those who want to dump US treasuries is that if everyone goes to sell at once the price goes down and foreigners as well as Americans lose. Nevertheless Japan, China, the Brits and others are gradually gettin rid of US debt. What will the end result be?

Too Much Debt and Too Few Buyers

There are two problems here, first is the administration’s desire to cut taxes without a guarantee that there will be matching revenues from increased business. Second is the risk of a trade war and subsequent depression. If no one wants to buy US debt rates will go up until there are buyers. This will hugely increase the cost of servicing America’s debt. According to fixthedebt.org US debt held by the public, domestic and foreign debt holders, is $14 Trillion or 75% of the US GDP. Add in debts owed to other parts of the Federal Government such as the Social Security Trust fund and debt is $19 Trillion or 105% of the GDP. This can be expected to get worse under Trump’s policies. The web site lists the expected effects of an ever increasing national debt.

Higher costs of living: Large amounts of debt mean higher interest rates on everything from credit cards to mortgage loans.

Slower wage growth: In normal economic times, every dollar an investor spends buying government debt is a dollar not invested elsewhere in the economy. That is, high debt “crowds out” more productive investments, leading to slower economic growth and lower wages.

Generational inequality: By not making responsible debt choices, we are placing higher debt burdens on our children and threatening their standard of living and retirement.

Reduced fiscal flexibility: Our debt levels doubled between 2008 and 2013 from 35 percent of GDP to over 70 percent, a result of and in response to the Great Recession. We can’t afford another recession. With an already high debt, the government has less room to respond to future crises such as international events or economic downturns.

Fiscal crises: Unchecked debt growth could eventually lead to a fiscal crisis, as recently occurred across Europe. At that point, investors in U.S. debt will demand higher returns, driving up interest payments, and leading to a debt situation spiraling out of control.

Japan, China, Britain and others have problems of their own. They are selling US treasuries because they doubt the full faith and trust of the American government in the era of nationalist anger personified by the current president.