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Thursday, November 20, 2008


yen-denominated treasuries?

it's a concession to reality that the united states will end up having to accede to as its borrowing has become too large a slice of global savings. naked capitalism cites the trial balloon floated by large japanese banks, probably in concert with the japanese government.

UPDATE: on reading today's ft, i bumped this post forward. they rightly note the wholesale transfer of debt to the government balance sheet now underway as the necessary step in maintaining debt-to-GDP and avoiding a debt deflation more serious than that experienced in the 1930s. and they further correctly note the need of continuing and even expanded foreign financing to avoid a dollar collapse, with this financing now directed into treasuries only (and neither agencies nor corporates). which leads to:

Certainly, neither a sharp devaluation of the dollar or the increased cost of protecting against a US default is attractive to the dollar-surplus nations. The question is what other choice do they have?

One theory is the redirection of dollars on a mass scale into the financing of emerging market economies. Both EM corporate and sovereign dollar-denominated debt issuance will increasingly be able to compete with the issuance of the US and UK treasures. While it might not absorb all the surpluses, it would certainly be enough to knock the balance.

In that scenario, what could the US do? One theory doing the rounds in Japan is US foreign-currency denominated debt issuance of its own. According to the Asia Times this would incentivise flows by protecting against possible dollar devaluation. Plus, the practice is not new. It was done before by the Carter administration in the 1970s. Known as “Carter bonds”, the debt was denominated in German marks and Swiss francs to attract foreign investors.

Faced with the unprecedented growth of the US budget deficit and the prospect of an increasingly weaker dollar compared with the yen reducing the value of Treasury debt held by Japan, economists in Tokyo are calling for the administration of president-elect Barack Obama to issue US Treasuries denominated in yen and other currencies. The issuance of foreign currency-denominated US Treasures would reduce the perceived risk of holding the debt.

Behold the dawn of the ‘Obama bond’.

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