When we read reports about "consumer confidence," they tend to involve an attempt to measure just how much stuff Americans are buying from one month to the next. There may be efforts to account for plans to buy, as opposed to actual buying; and it is unclear what the metrics do with purchases whose payments are extended to credit over some contractually established period. These days, however, the consumers we probably need to care about the most are those investing in our debt. If we are to believe a report released this morning on the BBC News Web site, the confidence of those consumers is in a slump:
Foreign demand for US Treasury bonds and notes fell by a record amount in December as China reduced its holdings.
The Treasury said foreign holdings of US debt dropped by $53bn, surpassing the previous record set last April.
China cut its holdings by $34.2bn - meaning it is now the second-biggest US debt holder after Japan.
China was a net seller for a second straight month.
Its bond holdings amounted to $755.4bn in December, down from $789.6bn the previous month.
China has previously questioned whether the US bonds are safe and whether it can sustain its deficits. It has also questioned the US dollar's role as the world's reserve currency.
Setting aside any questions about Communist ideology, this is a situation in which we should assume that, as investors, the Chinese think the same way as other investors. When one invests in a bond, one is clearly interested in the yield of that bond; but one also has to worry about whether or not the organization that floated the bond will be around to provide that yield. Sustaining a deficit is all about paying the yields on the bonds issued to pay for that deficit. In the corporate world, if a company cannot sustain its deficit, it goes into receivership. Has this happened at the level of a country; and, if so, who would the "receiver" be? We know all about the histories of governments that fall to military conquest. Is there anything history can tell us about our current situation? If so, will it be important enough to wean us away from a determination to ignore history?