Taiwan & Treasuries

With the market heading down again today and investors buying even more U.S. Treasurys, sometimes it’s worth taking a ‘step back look’. Investors obviously trust Treasurys more than stocks. However, the situation begs an important question: are U.S. Treasurys worth it? In other words, does the United States have the ability to pay back every creditor?

Think about it. As of Wednesday, according to the Treasury Department, U.S. debt now stands at $10,495,669,391,439.70. That’s a sizeable chunk of money. In addition, everyone knows that if foreigners stop buying U.S. Treasurys, we’re toast. It’s sort of like musical chairs – as long as the music is playing (people buying Treasurys) then everyone gets to stay in the game. But if the music stops, then the U.S. will be asked to leave the party. Yes, the U.S. government can still go bankrupt.

Hence this Asian Investor story from Taiwan is quite alarming.

Regulators have ordered Taiwanese insurers to limit their holdings of Fannie Mae, Freddie Mac, and Ginnie Mae debt.  The disturbing part is the inclusion of Ginnie Mae on the list.  While the status of Fannie and Freddie is a little murky right now, Ginnie Mae paper is a full faith & credit U.S. government obligation – as good as T-bills.

In other words, one of our primary trading partners appears to be losing confidence in the U.S. government’s ability to repay its debt.  They don’t think the U.S. is good for the money. Shocking!

Perhaps the Taiwanese don’t grasp this distinction. That would mean their regulators are utterly clueless about the rules they are issuing, a very disturbing development. Still, it’s not as bad as our regulators allowing debt-leveraged investment banks like Bear Stearns and Lehman Brothers to go bust. It wouldn’t be the first time a government was naive about the market.

Will Taiwan be the first of many governments to steer investors away from U.S. Treasurys? Time will tell. Stay tuned for more developments. This could be earth-shattering.

 woodleywonderworks