Will China continue to fund the U.S. deficit? What would happen to interest rates if China exited our U.S. Treasury market? Where would the United States attract the necessary funds? This dilemma has been one of the most widely debated topics in financial markets.
On the heels of the U.S.-China economic summit held last week in Washington, a story is now seeping into the market that at the behest of the Chinese, the U.S. Treasury will increase issuance of Treasury Inflation Protected Securities (TIPS). The Wall Street Journal reports, U.S., in Nod to China,to Sell More TIPS. This story gives us a lot of food for thought, including:
1. how quickly do the Chinese think inflation may rear its ugly head?
2. do the Chinese have a lack of confidence in Ben Bernanke specifically or the Federal Reserve in general?
3. how high do the Chinese think inflation may rise?
4. will we continue to witness Chinese officials calling for a move away from the U.S. dollar as the international reserve currency?
5. could we envision the U. S. Treasury executing the sale of TIPS on a private placement basis to the Chinese?
Who knows how this scenario will play out. For our purposes, the fact that our largest creditor is looking for inflation protection speaks volumes.
If the Chinese are concerned about inflation, then I am as well.