Longer excerpt from The New
Depression (taken from my Kindle highlights, so the excerpts aren't necessarily the paragraphs I have put them in below, and there may be things in
between that I didn't highlight).
“The amount of government bonds
bought by foreign central banks is public information. The Fed’s Flow of Funds
data reveal that “official” (i.e., government) buyers from the “rest of the
world” (ROW) bought $1.13 trillion worth of U.S. government bonds between 1996
and 2007. That was equivalent to 90 percent of all new bonds the government
sold during that period. However, they did not buy up 90 percent of the
government bonds sold in each auction during those years. That is clear from
the information released following every treasury auction. That means that
central banks used the dollars they accumulated to buy a combination of new
bonds at auction and older government bonds that had been sold in earlier years
(i.e., both new bonds as they were sold by the government and older bonds
already owned by other investors). That explains a great deal about the
behavior of U.S. interest rates during that period.
When foreign central banks bought bonds that had been issued in earlier years,
bonds then owned by other investors, they pushed up the price of those bonds
and drove down their yields. That explains Chairman Greenspan’s so-called
“conundrum” over why government bond yields wouldn't rise despite the 17 rate
hikes by the Fed between June 2004 and June 2006, which were designed to push
them up. In other words, the Fed lost control over U.S. interest rates and,
therefore, over the economy as the result of central banks outside the United
States creating fiat money and investing it in U.S. government bonds.
By the end of 2007, “official”
investors from the ROW owned 34 percent of all U.S. government debt, up from 16
percent in 1996….The investment of $1.13 trillion into government bonds only
absorbed 28 percent of the nearly $4 trillion in dollar reserves central banks
accumulated between 1996 and 2007. Where was the other $2.8 trillion invested?
Fannie Mae, Freddie Mac, and the other smaller government-sponsored enterprises
(GSEs) absorbed $929 billion of it.
Of course, when Fannie and Freddie issued debt, they used the proceeds to
acquire mortgages. Thus, the official foreign buyers (composed almost entirely
of central banks) were indirectly responsible for pumping $929 billion into the
inflating U.S. property bubble.
With $1.13 trillion, official foreign buyers acquired the equivalent of 90
percent of all new governments bonds sold between 1996 and 2007; and with
another $929 billion they acquired 19 percent of all the debt issued or backed
by the GSEs over that period. What did they do with the remaining $1.94
trillion they are believed to have acquired as foreign exchange reserves? Those
dollars may have been invested in U.S. corporate bonds or in U.S. equities. The
Flow of Funds data do not disclose the stakes held by “official” buyers in U.S.
corporate bonds and in U.S. equities. Therefore, it is only possible to
speculate. However, those dollars must have been invested in U.S.
dollar-denominated assets and they must have put very considerable upward
pressure on the prices of the assets in which they were invested.
The increase in the share of U.S.
assets held by foreign investors over this 12-year period is striking. The
ROW’s share of U.S. Treasury securities increased from 28 percent of the total
in 1996 to 46 percent in 2007. The ROW’s share in GSE debt rose from 5 percent
to 21 percent; in corporate bonds from 14 percent to 24 percent; and in U.S.
equities from 6 percent to 11 percent.
It is important to emphasize that
much of the increase in the ROW’s ownership of U.S. securities was the result
of central banks creating fiat money, buying dollars, and investing those
dollars in U.S. dollar-denominated assets. No other conclusion is possible.
Wherever that money was invested, it drove up asset prices, resulting in a
significant impact on the U.S.
To the extent that it went into bonds, it drove up bond prices and drove down
bond yields. That reduction in yields resulted in many investments being made
that would not have been undertaken at a higher level of borrowing costs. To
the extent that the dollars were invested in equities, they pushed up stock
prices and created a wealth effect that permitted more consumption to occur
than would have been possible otherwise. In short, those dollars distorted the
U.S. economy by funding bad investments and excessive consumption, thus
increasing its vulnerability to the downturn that got underway in late 2007.
Bernanke liked to explain that countries such as China, Japan, Korea, and
Taiwan had such a high propensity to save that it simply wasn't possible for
them to find profitable investment opportunities for so much savings in their
own countries (despite the very high rates of economic growth that most of
those countries experienced). Therefore, they were compelled to lend to the
United States, thereby causing America’s massive current account deficit. That
line of reasoning became known as Bernanke’s global savings glut theory.
That argument ignores one very important fact: Most of the money those
countries invest in the United States is not derived from savings. The money
those countries invest is newly created fiat money. When the PBOC created $460
billion worth of yuan in 2007 to manipulate its currency by buying dollars,
that $460 billion worth of yuan was not “saved,” it was created from thin air
as part of government policy designed to hold down the value of its currency so
as to perpetuate China’s low-wage trade advantage. That is a very important
difference. It introduces a third variable in addition to saving and
investment, fiat money creation.”