This Is How It Begins

The following quote is from a very talented financial analyst named Dan Ferris. I'm citing it without permission, so if I get yelled at I'll take it down. But I thought it so succinctly pictured the tiny drops that are beginning to fall which are going to become an economic toad-choker (a Southern colloquialism) in the years ahead in our economy:

Today, news came out that China held 1.3% fewer Treasuries in February than in January – the fourth consecutive monthly decline. I guess China is allowing Treasury bonds to mature without replacing them, rather than actively selling, but I don't know how to tell for sure. It hardly matters. When your No. 1 customer stops buying, you have a problem. Japan is the No. 2 foreign Treasury holder in the world, and it too held fewer Treasuries in February.

The following is my explanation, not Mr. Ferris', but I think he would agree:

This means the number one and two nations who keep the United States afloat financially by lending us money through the purchase of U.S. bonds (debt instruments), China and Japan, are pulling back. They're tired of buying U.S. bonds that pay practically nothing in interest. In order to open their checkbooks again, the U.S. will have to raise the interest rate it pays higher and higher. Rising interest rates mean inflation. Inflation means a devalued U.S. dollar. And that means a serious hit to the lifestyle (spending power) of every American.

And because the U.S. has no cash with which to pay off those bonds to our lenders when they come due, we'll borrow and print even more money, going further into debt and increasing the devaluation of the dollar.

The saddest reflection on the quote above is that most Americans would not know what it portends for the future—for China and Japan to begin buying fewer bonds from America. But we are about to find out.