Another ‘Pay China First’ Act Heads to Congress
Last Wednesday, the House Ways and Means Committee passed a bill that would would protect Social Security recipients and Treasury investors in the event that the government hits its borrowing cap. The measure would exempt interest payments on Treasury bonds and Social Security trust funds, as well as principal payments on Treasury bonds from the statutory debt limit.
Like many issues involving the government’s finances, support for this bill is split along party lines. The committee passed the bill in a 22-to-14 straight-line vote, with Republicans in favor and Democrats opposed. Invoking phraseology used in 2011, the last time Uncle Sam brushed his head against the ceiling, pugnacious Democrats have refereed to the bill as the ‘Pay China First Act.’
At odds is whether or not the bill unjustifiably prioritizes paying foreign holders of American debt over important domestic programs such as benefits for students, the elderly, and veterans. Nearly half of the debt on the public market is owned by foreign entities.
In April, the Treasury released its international capital data report, which can be used as a broad measure of foreign demand for U.S. debt and assets. Strong inflows will put downward pressure on interest rates and help maintain a strong dollar.
“The sum total in February of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a monthly net TIC inflow of $53.6 billion,” reported the Treasury earlier in April.
“Of this, net foreign private inflows were $44.4 billion, and net foreign official inflows were $9.2 billion,” the Treasury report continued. Foreign residents purchased a net total of $7.6 billion long-term U.S. securities in February. Meanwhile. U.S. residents increased their holdings of long-term foreign securities by $25.4 billion.
Taking into account both foreign and U.S. securities transactions, net foreign purchases of long-term securities were -$17.8 billion. This is down from net purchases of $25.7 billion in January, and widely unexpected. Analysts surveyed by Bloomberg expected net buying of $40 billion for February. Overall, it seems like investors looked for shelter outside of the U.S. in the first few months of the year, which were politically turbulent.
In particular, investors in Japan, Switzerland, and the U.K. reduced their holdings of Treasuries. China remained the biggest foreign holder of U.S. Treasuries, increasing its stockpile by $8.7 billion to a total of $1.22 trillion. Japan’s stockpile fell $6.8 billion to $1.097 trillion.
The federal government is expected to max out its hypothetical credit card on May 18, although the Treasury is once again expected to pull a rabbit out of its hat and find a way to delay default until later in the summer.
The measure passed by the Ways and Means Committee is expected to make its way to Congress in the coming weeks, but it is unlikely to pass the Democratically-controlled Senate.
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