Sometimes you have to look at statistics over a period of time to get a good picture of what is happening. One of those things to take note of is the foreign holders of U.S. debt. Many of the major foreign central banks buy and hold U.S. Treasury securities as reserves. The U.S. dollar is still considered to be the world’s reserve currency, but for how long?
It is not easy to get completely accurate statistics, as even the Treasury has some seemingly conflicting numbers. But the trend is unmistakable.
Using Treasury data that goes through April 2024, Japan has slightly increased its holdings from a year ago. It is still well over a trillion dollars.
But the notable country is China, which several years ago held about the same as Japan. China used to have over a trillion dollars in Treasury securities. Now it is down to below $800 billion.
What is notable is just how slowly the reserves are going down. Some months they increase slightly. But the trend is definitely down.
This tells us that the Chinese central bank is not actively selling U.S. debt in any significant way. It is probably just allowing some debt to mature and not rolling it all over. Over time, this reduces its holdings.
Also note that the dollar has lost significant purchasing power over the last several years. The value of a trillion dollars today is worth what about $800 billion would have bought you 6 years ago. You could say that China is de-dollarizing just through attrition.
Why is China Moving Away?
If you want to know why China is slowly moving away from the dollar, the answer is Russia.
The Chinese see what has happened to Russia, especially with regards to sanctions and defaults imposed by the U.S. government. They wisely don’t want the same thing to happen to them.
The U.S. has stiffed Russia. You can point fingers to whomever you want over Ukraine, but the fact remains that the U.S. has broken financial contracts and stolen wealth from Russia. This is a bad way to do business.
What if there is any dispute over Taiwan or even something more minor? Will the U.S. government just default on all of the debt owed to the Chinese government? It looks likely that that would happen.
Chinese officials are doing this in a wise and subtle way. They didn’t pull the fire alarm and start selling like crazy. That in itself could have led to more conflict with the U.S. Instead, the Chinese are very slowly backing away from the dollar and becoming more independent from the chaos makers in Washington. Who can blame them?
It is easy to not notice these things because it just happens slowly over time. But it certainly appears that China is slowly moving away from the dollar.
Consequences
This means it will be harder for the Federal Reserve to sell its debt at lower interest rates. It means that the dollar will continue to be used less and less for trade in world markets. Other countries are realizing that there doesn’t have to be a reserve currency of the world.
Ultimately, at some point down the road, this will make it harder for the U.S. government to continue to run up massive deficits while maintaining low interest rates.
This is a problem for U.S. officials, including Federal Reserve officials. It could be a problem for U.S. consumers when prices of foreign goods are more expensive.
The good news is that it will eventually put limits on U.S. government spending. It sometimes seems that there are no limits and that it will just go on forever. This will not be the case.