The Capital Spectator will be MIA for a few days. Back on Monday, August 23.

►The Great American Bond Bubble
Jeremy Siegel and Jeremy Schwartz/Wall Street Journal
Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago. A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds.
► China Reduces Holdings of Treasury Debt in June
Martin Crutsinger/AP
China reduced its holdings of U.S. Treasury debt for a second straight month in June while the holdings of Japan and Britain rose…The debt figures are being closely watched at a time when the U.S. government is running up record annual deficits. A drop in foreign demand would lead to higher interest rates in the United States.
►China Hiding Treasury Purchases
Derek Scissors/Heritage Foundation
China’s reported holdings of U.S. Treasury bonds fell sharply again in June and are now almost $100 billion lower than they were in July 2009. The press reports this as meaningful and important. It isn’t. You may have noticed that American interest rates are not soaring; in fact, they’re at historic lows. One reason they’re not soaring is because, contrary to widespread assertions, American interest rates don’t depend on the PRC. The other reason is, over the same period, reported British holdings of U.S. Treasuries rose $265 billion. Why would the UK increase its holdings 273% in 11 months, when the yield on Treasuries is close to zero? The answer: China’s State Administration for Foreign Exchange (SAFE) has an office in London. When purchases are made through that office, they are initially counted as purchases from Britain, not China. SAFE’s goal is to reduce China’s visible dependence on the United States.

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The president of the Minneapolis Fed, Narayana Kocherlakota, explained in a speech yesterday how deflation is possible but unlikely. Near the end of his talk he provided the setup: “I mentioned earlier that inflation has been near 1 percent recently. These data have led some observers to worry about the possibility of a multiyear period of falling prices—that is, persistent deflation. I don’t see this possibility as likely. It would require the FOMC to make the surprising mistake of ignoring the long run in its desire to fix the short run.”

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