The United States dollar became the world’s reserve currency in 1944 towards the end of World War II. Because the U.S. dollar is the world’s reserve currency, demand for dollars remains strong as countries hold dollars in reserve to buy oil, settle international trades and to hold as their nations’ savings. These dollar reserves are held in the form of U.S. Treasury bonds (T Bonds).
The United States is able to incur massive deficits funded in part by foreign purchases of U.S. debt and more recently through the Federal Reserve’s (the Fed) purchases of T Bonds as part of their multi-year/multi trillion dollar quantitative easing (QE) program whereby they printed dollars out of thin air to buy them.
As a result of QE more than a few nations, notably Iran, Russia, China and Brazil became increasingly concerned that the value of their T Bond holdings were being diluted by the Fed’s massive money printing campaign and have made efforts to reduce their need to hold dollars for settling their trade accounts. In October 2013, China called for the world to “de-Americanize” because “the destinies of others are in the hands of a hypocritical nation that have to be terminated”.
Such calls to “de-dollarize” have increased and been joined by Russia as the west battles Russia’s designs on Crimea and Ukraine with economic sanctions. In 2014, Russia and China signed a 30 year gas deal that supposedly does not involve dollars for payment.
Over the past few years China has launched a series of de-dollarization initiativeswhile holding their U.S. Treasury Reserves relatively constant.
China, however, however, sold more than $30 billion of U.S. Treasuries in July 2015 and while they added $1.7 billion in August, Belgium, whom some believe act as a proxy for China, shed $44.8 billion. China shed $12.5 billion in US Treasuries in September 2015 and another $3.2 billion in October 2015. China added $9.7 billion U.S. Treasuries in November but sold $18.2 billion in December 2015 and another $8.2 billion January 2016*. In 2016 Chinese holdings of US Treasury Securities fell about 30%.
Strained relationships bewteen the U.S. and Saudi Arabia, one of the largest holders of U.S. Treasuries (Saudi Arabia’s holdings are listed under “Oil Exporters”), could impact Saudi Arabia’s appetite to hold and or buy additional U.S. Treasuries.
For a short history of the Bretton Woods Agreement of 1944 that established the gold standard that would back the dollar as the world’s reserve currency and the subsequent removal of the gold standard in 1971 and the creation of the “petro dollar” that maintained the dollar’s world reserve currency status, click here.
Declining oil prices require that countries hold fewer dollar reserves to fund oil purchases.
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For the past ten years or so as Chinese exports to the United States have boomed, China has steadily increased its U.S. Treasury holdings to become the largest U.S. holder surpassing Japan. China’s willingness to purchase U.S. Treasuries for their reserves has allowed the United States to increase its deficits and to fund its liabilities.
In the past two years, China has been talking about reducing the pace of its purchases of T-Bonds and eventually reducing their holdings. As of October 2014, China held $1.252 trillion of U.S. T-bonds.
*As of November, 2017, China held $1.176 trillion in U.S. Treasury Bonds.
Chinese are the number one foreign holder of U.S. Treasuries
China, has been diversifying its reserves, selling its U.S. Treasuries and notably increasing their gold reserves. (see gold charts below)
Russia’s U.S. Treasury Holdings
Russia has historically held T-Bonds, but in small amounts ($153 billion as of March 2013). Russia had publically threatened to dump its T-bonds in retaliation for sanctions imposed on it by the U.S. and it appears to have begun to do so. As of October 2014, Russia held just $108 billion worth of T-Bonds.
Russia held $86.1 billion in U.S. Treasury bond holdings as of December, 2016, down 35% from January 2014
As of November 2017, Russia held $105.7 billion in U.S. Treasury Bonds down from $131.8 billion in January 2014 but up from $66.5 billion in April 2015.
Russia, like China, has been increasing its gold reserves steadily. (see gold charts below)
Belgium’s U.S Treasury Holdings
Belgium falls from the top ten foreign holders of U.S. Treasuries list
The most significant change in foreign holdings of U.S Treasuries is the dramatic increase and subsequent decrease in Belgium’s holdings over the past two years. Belgium held $188 billion of T Bonds in March 2013, $200 billion in November 2013, $257 billion in December of 2013 and $348 billion by October of 2014.
In January 2015, Belgium boosted their U.S. Treasury holdings to $354.6 billion. In February 2015 Belgium reduced their holdings to $354.3 billion. In April 2015, Belgium continued to shed its US Treasury holdings to $228 billion falling from third largest foreign holder to sixth.
In July 2015 Belgium dumped $52.3 billion in U.S. Treasuries after shedding $26.1 billion of U.S. Treasury Bonds in May bringing their total to $155.4 billion and placing them as the ninth largest foreign holder of U.S. Treasuries.
In August 2015 Belgium selling of U.S. Treasuries continued. Belgium shed $44.8 billion U.S. Treasuries in August putting their total at $110.7 billion and in 14th place among foreign holders of U.S. Treasuries. In September 2015, Belgium added $25.1 billion and added another $2.5 billion in October. In November, 2015, Belgium added $5.3 billion. In December 2015, Belgium shed $21.9 billion. In January 2016, Belgium added $15.8 billion.
As of December 2016, Belgium held $120.4 billion in US Treasury Bonds.
Since January 2014, Belgium has lowered their U.S. Treasury holdings by $207.8 billion.
There has been much speculation as to why Belgium emerged as the third largest holder of U.S. Treasuries in late 2014/early 2015. Belgium’s massive increase in U.S. Treasuries coincided with the Fed’s tapering of QE in December 2013 and with Russia’s selling of its T-Bonds.
Others suspected that China purchased the bonds through Belgium and has since been selling them.*
The Federal Reserve’s Holdings of U.S. Treasuries
During the quantitative easing programs of 2009-2013 the Fed had been purchasing between 60 and 90% of the newly issued treasuries as part of their QE program. The Fed bought U.S. Treasuries by printing the dollars needed to purchase them. Listen here to Ben Bernanke in 2009 explaining the rationale behind the dollar printing process and when it will stop.
The Fed now holds nearly $2.5 trillion T-Bonds, or about two times as many as China! Since the Fed had essentially become the T-Bond market over the past few years via QE, with the end of that program, who is buying T-Bonds that the Fed is no longer buying the amounts necessary to keep interest rates low? As incredulous as it may seem, it appeared that tiny Belgium had taken up that monumental task. That trend has now reversed with Belgium being the largest seller of U.S. Treasury Bonds.
Belgium has since sold off a large portion of its Treasuries.
Foreigners Diversifying and Moving Their Reserves from U.S. Treasuries To Gold
The movement away from the dollar appears to have begun. As recently as May 2013, the percentage of foreign exchange transactions conducted in dollars was 80% and the percentage of overseas reserves held in dollars was 60%. As countries sign more non dollar deals among themselves and diversify their reserves, these percentages will certainly fall.
As a result higher U.S. interest rates may attract demand for U.S. Treasuries as a reserve asset
According to the Fed itself, it holds no gold on its own behalf, but acts as custodian for other countries’ gold. Recently there has been some speculation that the Fed does not have the gold it claims to hold on behalf of other countries. For example, in January 2013, Germany requested the repatriation of a portion of its gold held by the Fed and their request was meet with an initial denial and a promise to return only some of the requested amount over seven years. Slowly, Germany’s gold appears to be making it back.
The United States Treasury supposedly holds most of the world’s gold, a good portion of it at Fort Knox, although an audit of that gold has not been held since the 1950’s. Former Congressman Ron Paul’s 2011 request to audit Fort Knox remains unanswered.
Impact of Reduced Demand for Dollars
The United States has enjoyed a high standard of living partially because it can fund its deficit spending via the sale of T-Bonds to foreigners or through the printing of money via the Federal Reserve’s QE programs.If the demand for dollars is reduced as the Fed tapers and ends QE and countries use currencies other than the dollar in international trade and reduce their dollar reserves, the value of the dollar will decline making imports to the U.S. more expensive and causing price inflation in the United States.
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To see charts showing top foreign holdings of U.S. Treauries in prior periods click here.
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*The U.S. Treasury notes that the data in its chart of Major Foreign Holders of U.S. Treasury Securites that the data is “collected primarily from U.S.-based custodians and broker-dealers. Since U.S. securities held in overseas custody accounts may not be attributed to the actual owners, the data may not provide a precise accounting of individual country ownership of Treasury securities.
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