Lower Current Account Deficit = Lower Demand for Treasuries

Because the US economy is much weaker, Americans are buying less foreign goods (especially Chinese made goods). And as a result, the Chinese are recycling less money back into US Treasuries. This is happening at a time when the US is increasing spending dramatically. Hence, the US has to monetize part of the debt because it can’t find enough Americans and foreigners to buy Treasuries.

All was pointed out by the deputy governor of the Peoples Bank of China:

In a discussion on the global role of the dollar, Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending.

He then addressed where demand for that debt would come from.

“The United States cannot force foreign governments to increase their holdings of Treasuries,” Zhu said, according to an audio recording of his remarks. “Double the holdings? It is definitely impossible.”

“The US current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world,” he added. “The world does not have so much money to buy more US Treasuries.”

China continues to see its foreign exchange reserves grow, albeit at a slower pace than in past years, due to a large trade surplus and inflows of foreign investment. They stood at US$2.3 trillion at the end of September.