Another Post-Depression Echo as U.S. Banks Become the New Japan and China and Buy Lots More Treasurys

Just as happened after WW II and for many years, the U.S. banking system is ramping up its holdings of Treasurys.  Bloomberg reports:

U.S. banks bought more government and related debt in the first two months of 2012 than they did in all of last year, an endorsement of Federal Reserve Chairman Ben S. Bernanke’s assessment of the economy that’s boosting demand for bonds even with yields near the lowest on record.

Commercial lenders purchased $78.2 billion of Treasuries and securities of agencies in January and February, compared with $62.6 billion in all of 2011, bringing their holdings to $1.78 trillion, Fed data show. Deposits exceeded loans by a record $1.63 trillion last month, up from $1.17 trillion in January 2011, providing scope to buy more bonds.

Unanswered (and unasked) is why this is happening now, several years after the putative end of the Great Recession.  There will be many reasons, of course; here are two.

One, as is laid out in the second sentence, the U.S. now has a large “yotai gap”, a topic which is discussed little in the part of the blogosphere I frequent; I discussed this topic recently.  (The yotai gap is a Japanese term for excess of deposits into banks over loans made by banks; it drives down interest rates on a supply-demand basis.)

Another is that Japan, a gigantic holder of Treasurys, has begun both to run a trade deficit and is losing population; these factors argue for it reducing its holding of Treasurys in order to meet its own internal debt obligations.  And in a related fashion, China’s international financial assets are heavily weighted toward Treasurys.

Given the role in rescuing the banking system a few years ago, the government has greater powers over it than it has had in many a decade.  Also from the same article:

Lenders have added Treasuries to meet new reserve rules from the Dodd-Frank financial-overhaul law and Basel III regulations set by the Bank for International Settlements in Basel, Switzerland.

Obviously, Dodd-Frank is a U.S. law.  No surprise that a deficit-heavy Federal budget would find buyers influenced by a major law that said government imposed.  And as for the Basel III regulations, which superpower has the greatest influence at the BIS?  Only one guess allowed…

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2 comments to Another Post-Depression Echo as U.S. Banks Become the New Japan and China and Buy Lots More Treasurys

  • dd

    hi Doc, nice piece — you have nailed this concept for a long time now. thanks.

    on another note, i found it very interesting that it would appear that rising gasoline prices are having quite an effect on the polls recently, Romney is gaining on Obama and i’ve seen a few where he’s in the lead.

    i guess the public isn’t buying the improving labor market story as much as they dread going to the pump.

    i’m sure these polls will zig and zag all the way up to the election, but man, this gas issue is even more at the forefront than i had thought. between that and grocery store, the president has some real challenges.

  • Agree, dd. The money-printing first goes where it is most highly-valued: and boy to people like to heat and air-condition their homes, drive to work, shop and play, etc. Eventually the money-printing should make nominal home prices rise, but gas may be $5 or … who knows by then?