China has reduced its US T-bill purchases in two of the last three months, but the country remains the largest international holder of US debt. Commentators sometimes worry about what would happen if China ceased purchasing US debt; however, this is much ado about nothing. China maintains an low exchange rate for the yuan to promote export related jobs in manufacturing over consumption. As a result of this policy, China runs a persistently high trade surplus with the US. Spending that money would lower the price of the dollar and raise the price of the yuan as the supply of dollars increased while demand remained level, so it is stashed in T-bills.
As a consequence, interest rates in the US remain low spurring more consumption and higher trade deficits, and so on. One day, this system will break down, just not today. In the meantime, Chinese T-bill purchases will fluctuate based on a variety of factors including the gross amount of exports in a given month.
The rich are different from you and me. When you or I come into some money, we may splurge on a nice dinner, new electronics or a weekend getaway. The rich are already consuming their maximum in these areas, so additional cash will flow to more esoteric sectors of the economy, like the collectibles market. The reason the world’s central banks claim to have inflation under control is due to where they look for it.
Energy and food prices have been generally stable here in the U.S., but check out the charts above. (For reference, the CPI and S&P 500 grew about 1% and 10% during the first half of the year.) Each collectible sector is growing at well above the rate of inflation save for art and antiques with the classic auto market possibly within bubble territory.
This data raises an interesting question. Will inflation remain segregated to the 1%, or will it eventually spill over to the 99? Intriguingly, housing inflation is already striking the 99% with higher median home prices and rising rents.
Job creation ran at about 1/3 the number necessary to absorb all the new entrants into the labor market during the month, but unemployment dropped anyway indicating the continuing decimation of the American workforce. This is actually good news for the stock market, because investors will expect more money printing and higher share prices bidding them up thus.
Supposedly, the Fed exercises monetary policy under a dual mandate of low inflation and low unemployment; yet, inflation remains high as we explained in the post above, and job creation has disappointed throughout the “recovery.” This money printing has been quite ineffective at spurring employment, but it continues. While the policy does little for the majority, very rich minority has paid lots of money in campaign contributions to ensure they become even richer:
Moreover, the Fed had lost control of rates since taper talk began in May. Informing markets that the Fed will be buying billions in T-bills almost every day has bid the yield back down with U.S. debt maintenance costs.
Existing home sales fell during September as higher financing rates and stagnant incomes have created significant headwinds for prospective purchasers. Well, at least we managed to reattain 2003’s sales pace. Look for more bad news in this space as the consequences of the government shutdown reveal themselves in October’s data.