Friday, February 15, 2013

Economy: U.S. - Bank Of The World

Today we got news that "foreign holdings of US debt hit $5.56 trillion in December" ( Yahoo Finance reports that "foreign holdings of U.S. Treasurys rose 0.3% in December from November ( It was the 12th consecutive monthly gain!

These numbers signal a growing confidence in the U.S. economy. They also show that the U.S. serves as a kind of bank for the rest of the world.

If you put for instance 100 bucks on a bank account you are lending money to them. In this case you are a creditor and the bank is the debtor. The mentioned U.S. Treasurys are bonds (debt obligations) with a very short maturity. They are similar to bank deposits because they pay low interest rates and they are liquid, meaning you could sell them easily like withdrawing money from the bank account.
                                                                                                                                                                                                                                                                                                                                                                                                                                                       Yahoo Finance also reports that "China, the top foreign holder, increased its holdings 1.7% to $1.2 trillion. Japan, the second largest holder, boosted its investment 0.2% to $1.12 trillion" (

The leading role of those Asian creditors isn`t surprising. Those countries have a long tradition of saving a lot (for retirement and for hard times). But when (almost) everybody saves money, meaning that (almost) everybody is a creditor, who will be the borrower then? Hence the Asian money lenders have to find borrowers abroad.

The numbers show that the U.S. is their favorite borrower. There are a lot of reasons for that: U.S. is the largest economy of the world and still growing. Maybe more important is that the U.S. has a very stable political structure and a sound law system which creates trust, the most important asset of any bank!

Another reason for the popularity of U.S. debts (serving as a kind bank account) is their high liquidity: If the lenders in Asia or elsewhere need their money back they can easily sell their Treasurys because they will effortless find buyers who also set their trust in the U.S. 

The U.S. also benefits from their role as bank of the world. The country collects a lot of money for very low interest rates. This is the reward for the services the nation provides. This very cheap money flows into the U.S. economy fueling the growth which could attract more foreign money - a virtuous circle.

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