Thanks, M for the correction - or at least partial correction that the Fed was not the leading buyer
at least in the first quarter of this year. But that does not change the narrative that they have been the primary. But more importantly, that they will be the primary buyer again because China will cease to roll over into new treasuries. Here's why.
The People's Bank of China owns almost $1.2 trillion in U. S. Treasury debt. It is the largest holder. Close behind is Japan. You can see which nation owns how much of U.S. Treasury debt in the
Treasury Department's monthly TIC report.
Take a look at the report. China held a maximum of a little over $1.3 trillion in July 2011.
Then it began to reduce its holdings by about $140 billion by January. The official policy of the bank is for greater diversification. This is a code phrase for "selling Treasury debt."
We know this: by mid-2011, China had gotten rid of almost all of its T-bills, meaning 90-day IOUs. It was holding U. S. bonds. So, when it ceases to buy bonds that come to maturity, its holdings fall. It does not have to sell T-bonds. It simply lets them mature. The U.S. Treasury must then credit China's account with this money. The central bank takes the money and runs.
The quiet way to get out of the dollar is to do nothing. Just take the dollars from the Treasury and invest them elsewhere in U.S. markets, or sell them for other currencies.
It is not clear that China has begun a bank run on the Treasury. But word is beginning to get out. If the bank's present policy continues – a refusal to roll over maturing debt – the Treasury Department will have to find new buyers.
There will come a day when the refusal of creditors to roll over the debt will increase. Then, without warning, the rollovers will cease. The creditors will decide to keep their dollars and forgo the rollover. On that day, the Treasury will have to go to the FED and demand that the FED buy its debt.
The first indications of a bank run by China have begun. There is no panic yet. The system is bumping along. But if China does not reverse itself soon, it will become clear that the U.S. Treasury is over-leveraged. It has more debt than its income can sustain.
So now when you see Japan surpass China as largest foreign debt holder, you'll know it no cause for celebration.
Thanks for posting your reply. When M's post, I wanted to reply but all I had was my phone which would have been very painful.
As you mentioned, CNBC's article is of a specific timeframe (first quarter), and as the article even states:
The Fed, meanwhile, actually slightly decreased its net holdings, not a surprise since its latest
quantitative easing 
endeavor begun in September — nicknamed Operation Twist — was designed to be balance sheet-neutral. The central bank is selling short-dated notes and buying an equal number of longer-duration issues in an effort to drive down borrowing rates and boost risk.
So,
1) Twist was designed to be neutral, and came after the huge central bank purchases of Treasury debt (in 2011).
2) Twist was designed to push down rates on the long end of the curve by buying longer dated maturities while selling shorter dated maturities. This chart:
Market Matrix US Sell 2 Year & Buy 10 Year Bond Yield Spread Analysis - USYC2Y10 - Bloomberg shows a one year history of the 10 year rate minus the 2 year rate. While the Fed is only one player (but a big one), you can see that Twist (or the knowledge of it) had an effect on the spread. On this older graph:
http://2.bp.blogspot.com/_nSTO-vZpS.../wCMffjQSktY/s1600/Treasury+spread+TIPS10.png you can see where the spread went down dramatically in late 2008 as inflation expectations (which is what the spread is an indicator of) collapsed...which makes perfect sense as credit defaults are deflationary. Then, during QE (before twist), the spread and inflation expectations climbed back.
Think about whether the people who repeatedly cite Greece as a warning have a certain type of fiscal agenda or not.
Are they only pointing out a cautionary tale?
Are the comparisons valid? Actually, I just heard by some measures, the UK may be worse in some fiscal metrics than Greece, despite being on austerity for over a year now.
So, since you "just heard", what measures are those?
Greece is a "cautionary tale" because it shows what happens when a countries population thinks it can continue to live beyond its means indefinitely and without serious repercussions. In the old, old days when their was a gold standard, austerity was automatically enforced in the sense that a currency was backed by gold. So, the owed party could demand payment in gold. Greece's currency can't devalue (making their exports more competitive). One of the major issues in Europe (as compared to the USA) is that there is much less mobility of labor. In the USA, if one part of the country is sucking wind, but another is doing good, labor will migrate. This is one factor allowing us to have a single currency.
Regarding stocks, they can do OK in a hyper-inflationary environment, and did so in the Weimar Republic hyper-inflation (expressed in real terms, e.g. converted into US $). (OK means mostly held their own.)
Bad stuff:
Contracts in fixed prices (e.g. Rentals, my PENSION)
Longer dated notes/bonds that aren't inflation adjusted
Stock's with little ability to raise prices
Good stuff:
Food. Land, especially if it can be used for food or fuel. Maybe precious metals (but you can't eat them). Inflation hedged debt instruments (assuming the hedge is fairly accurate plus the risk of non-payment). Guns? Ammo? Beer.
Stock with real backing assets and ability to raise prices.
Currencies from those few countries not racing to the bottom in terms of monetary policy, especially in asset rich countries.
I dunno, looking for ideas.
I just added a new section to my net worth/holdings spreadsheet, where I am trying to [-]guess[/-] estimate the % of inflation hedge from the asset. For example, long term non-inflation adjusted bonds would be 0%. Gold 100%? Inflation adjusted US Treasuries 90%? And so on. With this, I can [-]guess[/-] estimate my overall portfolio inflation hedge.
