Foreign Countries are Dumping US Debt

Many foreign countries have decreased their demand for US government debt. Even China, which holds more US debt than any other country, has lowered its US Treasury debt from 14 percent to 7 percent. There is little chance that China will dump all of its US debt at once. If it did, the US dollar would collapse and severely affect international trade. Still, there appears to be a trend.

US investors, on the other hand, are increasing investment in US debt. While the global economic situation is teetering with uncertainty, US government bonds are still considered a reliable and risk-free investment.

There is concern that US bond yields will increase if more foreign investors sell their holdings. If this were to happen, interest rates would likely rise, making borrowing more difficult. But that has not yet happened. So far, US investors appear happy to invest in Treasury bonds, increasing their holdings from 1.4 trillion in 2017 to $2.3 trillion during the 4th quarter of 2018. China now holds less US debt than American investors.

While they are ridding themselves of US debt, global central banks are embracing the purchase of gold. Much of this gold rush is an effort to erode the dominance of the US dollar on the global market. In 2018, central banks bought over 650 tons of gold. This is up 74 percent from 2017 gold purchases. Russian, India, Hungary, and Turkey were the most significant gold investors.

To many countries, gold means long-term economic stability and decreased dependence on global economic fluctuations. While bonds and other investments invariably come with risks attached, gold is relatively risk-free. With potential global tension looming, countries are aiming for economic stability.

Countries such as Russia and China are hoarding gold in an effort to devalue the US dollar. The dollar is the global reserve currency, and it gives the US broad global economic powers. If the value of the US dollar continues to decrease, so does its influence on the world economic stage.

President Trump has initiated strong economic sanctions against Iran. European countries such as Germany, France, and Britain have felt the economic effects of these sanctions. While they haven’t been able to subvert Trump’s sanctions, it is certainly in their interest at this time to elevate the euro as the major global currency and devalue the US dollar.

In the event of a true global economic upheaval, the US and its dollar would be at the center of the storm. According to Ulf Lineqhl, head of AG Bisset Associates, if the value of the US dollars continues to decrease, it could lose 40 percent of its value against the euro within five years.

By ridding itself of US debt and increasing its gold supply, China’s policy could adversely affect the US economy. With the Federal Reserve keeping the price of gold at an artificial low in order to keep the value of the dollar high and in a dominant position, the rest of the world is taking advance of gold’s bargain price to strengthen local economies – to the detriment of the US.

Other countries seem to recognize gold as money. Does the Federal Reserve, with its continued reliance on fiat currency?

 

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