February 17, 2004

Who's the Fourth Largest Owner of U.S. Bonds?

Here's a fact: between 2002 and 2003, Caribbean banking center's added to their ownership of U.S. bonds by almost 40%, from $49.5 billion in 2002 to $69.5 billion in 2003. They are now the fourth largest owner of U.S. bonds, behind Japan, China, and the U.K. You can see how, with just a little imagination, you could come up with some intriguing explanations for this. Narco traffickers, terrorists..Hungarian born international financiers building a huge position up...to gain some leverage. Some political leverage. Or it could just be hedge funds. I'm checking with my friend John Mauldin, the hedge fund guru, about this. And aside from the cloak and dagger, it seems like a new kind of issue in international capital flows...non-state actors establishing huge positions in U.S. bonds. If it's just an aggregate number--a few hundred or thousand wealthy individual investors holding U.S. bonds through off-shore banks--it's much less...ominous. Curiously, the Fed doesn't seem to know much about. Hat tip to the fire-breathing Doug Noland at Prudentbear.com for unearthing this exchange last week between a man who knows a thing or two about capital flows--former Goldman Sachs co-chairman and current senator Jon Corzine--and Alan Greenspan. Here's the exchange with commentary from Doug. Emphasis added is mine. "It is fascinating to have the former Goldman Sachs co-chairman posing questions to our Fed chairman. I found the following discussion, and Dr. Greenspan's apparent impatient demeanor, especially intriguing. Senator Jon Corzine: "With regard to top 10 countries holding our national debt. I have a particular curiosity about the Caribbean banking centers and what their implications are with respect to our concern about funding of all kinds of miscellaneous problems that could potentially exist. And I would love to hear an analysis of what is driving the fourth-highest concentration of our debt being held by Caribbean banking centers." Alan Greenspan: "I'm sorry, was that a question to me?" Senator Corzine: "Yes, that is a question that we can ask if there could be an analysis that..." Alan Greenspan: "One has to look at it." Senator Corzine: "Yes, please." Alan Greenspan: "And in the context of, as you are far more aware than I, that the amount of information that those individual institutions in those various areas produce is less than we would like to see. But we'll take a look at it and see what we can find." Senator Corzine: "I think the issue in the funding of global terror, one wonders why so much of the external debt the United States is getting housed in among institutions that we have very little idea about. I think it's a fair..." Alan Greenspan: "We'll see what we can find." Noland comment: It is Simply Not Credible that the Fed has not by now spent significant resources delving into the issue of ballooning holdings of U.S. securities at off-shore banking centers.


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