Wednesday, August 5, 2009

Treasury plans for more sales of TIPS - because China says so?

WSJ reports the Treasury Department, seeking new ways to help fund its budget deficit, is likely to announce on Wednesday a plan to ramp up sales of inflation-protected bonds, according to people familiar with the matter. China, the largest holder of U.S. government debt, is among investors that have indicated to the Treasury that they want to buy more of the securities, which offer protection against rising inflation, the people said. Officials from the U.S. and China discussed TIPS issuance at high-level talks in Washington last week. U.S. officials assured their Chinese counterparts that they remained committed to TIPS sales, according to a person with knowledge of the discussions. China has accumulated more than $2 trillion in foreign-exchange reserves and has invested about $800 billion in Treasurys. The TIPS announcement will likely come as part of Treasury's scheduled announcement on funding for the third quarter, the people said.

It would seem China sees the possibility of inflation and wants to be protected (to some extent). I don't blame them.

1 comment:

  1. Problem: With non-TIPS, default is impossible because we can just print more money. With TIPS, it actually becomes possible for the U.S. government to default on its own dollar-denominated debt, because the more money we print, the more we owe on the TIPS (because printing more money causes inflation). SO, IF WE SELL ENOUGH TIPS TO A FOREIGN POWER, IT HAS THE ABILITY TO TRIGGER A DEFAULT. Good thing the government of China is only concerned about our well-being!


None of my content is a recommendation to buy or sell any securities.

Please do your own research or consult an advisor before making any investments.