When will foreign central banks stop financing the U.S.? When will the tipping point occur?
No one really knows. But there is little doubt that many in the markets are starting to get a bit nervous. They are watching the data that show central bank purchases of Treasury bills very, very closely for any signs that foreign central banks are losing interest in the U.S. If the dollar starts to fall – or if the price of Treasury bonds starts to fall (corresponding to higher interest rates) – foreign central banks holding Treasuries risk big losses. The way to avoid those losses is to get out before everyone else. But if too many central banks stop new lending to the U.S., let alone start selling their bonds, the whole system of vendor financing will unravel. The tipping point could come quickly. But the system of central bank financing could also last for a while longer, particularly if China keeps its exchange rate pegged at the current low level and Japan resumes large scale dollar purchases to keep its currency from rising against the dollar. But I have a hard time seeing how t
