Tuesday, April 05, 2005



by Mark G. Levey

In his Social Security road show, President George W. Bush stated that the U.S. Treasury bonds held by the Social Security trust fund are "worthless." The Associated Press carried the following report:

WHITE HOUSE Explaining why Social Security is in dire straits, President Bush has warned more than once that there is no Social Security trust fund. Today, he's visiting a federal building in West Virginia to explain what he meant. That building -- the Bureau of the Public Debt in Parkersburg -- contains a file cabinet filled with I-O-Us. It's all that's left after Uncle Sam takes Social Security's payroll tax money and converts it into 15-year bonds.Bush insists the system is pay-as-you-go -- meaning the surpluses of prior years don't really exist, and Social Security can only pay benefits while payroll taxes are rolling in. But starting in 12 years, more will go out than comes in, according to the system's trustees. The president's critics say the bonds are as solid as any other federal paper -- and help mask the multi (b) billion dollar deficits Bush has run up. This raises the question:
What would happen if the holders of U.S. Treasuries took W seriously? We'd be stuck paying out over a trillion USD in foreign IOUs.

CONSIDER THE FOLLOWING: Over time, the Asian exporting countries have been placing a big percentage of their exchange earnings into US Treasuries. The leader continues to be Japan, with China now the #2 foreign holder of US debt.

Reportedly, China is shifting its portfolio away from US investments, which include billions in real estate trusts and Federally backed loans. Fannie Mae and Freddie Mac are the focus of major accounting scandals, and the former lost five percent of its value Monday.
Shares of Fannie Mae tumbled Monday to their lowest intraday level in more than 10 years on a report that the mortgage financing company's chief regulator is looking into possible improper accounting of trusts it uses to sell mortgage-backed debt. Shares of Fannie Mae, a government-sponsored entity that buys mortgages from banks and then repackages and sells them as bonds called mortgage-backed securities, fell $2.68, or 5 percent, to $50.56 in midday trading, and was one of the New York Stock Exchange's biggest percentage losers and most active issues. The stock dropped to a new 52-week low of $49.75 earlier in the day, down about 30 percent since early January.

The Saudis and other Gulf oil exporters bailed out of U.S. Treasuries a long time ago, and aren't even on the list anymore.http://www.msnbc.msn.com/id/7294906 /Who holds U.S. Treasury securities as of January, 2005 Amount in billions $ Percentage of foreign-held Treasury debt Japan 701.6 36% Mainland China 194.5 10% United Kingdom 163 8% Caribbean Banking Centers* 92.5 5% Korea 67.7 3% *Bahamas, Bermuda, Cayman Islands, et al.(Source: US TREASURY DEPT)--------------------------------------------------------------
AND, LOOK WHERE THINGS STOOD TWENTY YEARS AGO:http://www.treas.gov/tic/shl94sum.html Table 5 Foreign Portfolio Investment in Long-Term SecuritiesTop 10 Investing Countries(Amounts in $ Billions)

Japan and the United Kingdom have maintained their positions as the top portfolio investing countries in U.S. securities. However, the rate of growth for Japan has decreased significantly. Between 1984 and 1989, Japanese holdings increased from $28 billion to $180 billion, or over 500%. Between 1989 and 1994 their holdings increased by only 28%.On the other hand, holdings of the Middle East Oil Exporting countries (Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) decreased from $54 billion to $45 billion. In 1984, these countries together held 17% of foreign holdings of U.S. long-term securities. By 1994, their holdings represented less than 4% of the total held by foreigners. The Unknown line is largely Eurobonds held in bearer form for which no ownership information is available. The level of Eurobond holdings have increased significantly since the 1984 survey as the size and importance of the Eurobond market has increased.
That giant popping sound you just heard was the real estate bubble.
The days of cheap and easy home equity credit just ended. Add this to skyrocketing energy costs, and we have a prescription for one hell of a long, hot summer. This would be the time that BushCo introduces its favorite randomizer -- war -- in hopes of distracting us and reshuffling the political deck. I'd bet anything on it.

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