Global Constipation

See those idle containers? Stacked dockside in Shanghai, they are a sign that worldwide demand for Chinese goods has slackened. This means that fewer euros and U.S. dollars are finding their way to China, which makes it harder for the Chinese to keep buying foreign debt. They may no longer want so much foreign debt. After all, they have a domestic stimulus package of their own to bankroll, to the tune of about $600 billion.

President-elect Barack Obama hopes to trump that with $800 billion worth of stimulus here in the U.S. Since the U.S. Treasury does not have $800 billion, it will have to borrow it somewhere. Normally our Chinese buddies would be good for that, but they are already stuffed with $1 trillion of American debt. If the Chinese are backing away, why are the prices of U.S. Treasury bonds surging? Who is doing the buying?

Let us hazard a guess here. Could it be that American banks--you know, the ones that have taken down all that TARP money--are lending it back to the federal government? If that is the case, taxpayers would be borrowing from themselves, with the banks getting a handling fee. These are the same banks that would have failed (and may yet still) without taxpayer assistance. Sounds pretty incestuous to me.

Uncle Sam is not the only borrower out there. Governments around the world are expected to issue $3 trillion in debt in 2009 to stimulate slowing economies--three times more than in 2008. Yesterday the German government tried to auction off €6 billion in 10-year bonds, but could get rid of only 87 percent. The Bundesbank had to eat the rest. If the same thing starts happening at Treasury auctions, prepare for the mother of all meltdowns.