2nd
Thoughts On Demand For Treasuries
The Fed completed its $300 billion Treasuries purchase program.
Fed purchases have helped buttress demand as the U.S. sells record amounts of debt to finance a budget deficit that exceeds $1 trillion for the first time. Total sales of Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20.
If the personal savings rate in the US went back from 3-5% level to 10% (as in the seventies) or to 15% (as in Europe today), there would be an additional demand of Treasuries for $500-1000 billion (every percentage point in savings rate adds roughly $100 billion in savings).
But that only considers the flow of new savings. In addition one should consider the shift of the stock of savings from equities to safer bonds, after two bubble bursts in ten years.
All in all, I think it’s Japan all over again: in the New Normal, Americans will save more and rebalance their portfolios into safer Treasuries propping up demand and reducing the dependence of the US on foreign investors (China, Japan, UK). That will be true notwithstanding trillion-dollar deficits, growing public debt and off-balance sheet contingent liabilities of $50 trillion in social security and health care.
The stock of savings can delay the doomsday on the bond market for a few years, until a wave of babyboomers start spending their savings for their retirement and health care needs, reducing the demand of Treasuries again. Which is what is happening in Japan in the near future (see Hayman Capital October 2009 Letter and this IMF July 2009 Report on Japan (pdf).
