We are told time and again that the major economies of the world, who are borrowing funds to finance their deficits, will be going bust any time soon. It was, therefore, interesting to note in this morning's Financial Times that:
Foreign investors scooped a near record amount of US debt in August and sharply increased their holdings of Treasury bonds, according to the latest Treasury International Capital report.
August was marked by fears that the US economy faced a possible double dip recession and yields on Treasury bonds fell sharply as bond investors priced in a move by the Federal Reserve to start another round of quantitative easing. The Fed announced in August that it would start reinvesting principal payments from its agency debt and agency mortgage-backed securities in longer-term Treasury securities.
What can be interpreted from this?
The first, obvious conclusion is that investors are utterly irrational if those who predict economic devastation for Western governments are correct.
Alternatively, there is now no such thing as the long-term, and therefore all action is completely and utterly speculative. But in the case I wonder where this money will go when it pours out of Treasury bonds? There is no obvious destination.
Alternatively, and perhaps most plausibly, we're not going bust any time soon. Nor is the USA. In fact, in the absence of any sign of serious economic activity relating to growth, new products, innovation, investment or enterprise in the market sector the only sensible place to put your money is in government bonds because like it or not the government are the only people who can use money to good effect at this point of time. And what the markets are saying is that they want governments to act proactively with their money to clear deficits by promoting growth.
That's not what the naysayers want to hear.
But that's what the serious money is saying.
I'm with the money on this one.