“I have always depended on the kindness of strangers,” said Blanche DuBois, in the final words of the play A Streetcar Named Desire. Well, don’t we all.

Many citizens probably still cling to the old saw that public debt doesn’t matter because “we owe it to ourselves.” Wrong. Debt always matters. And as for whom we owe it to, it is a lot of kind (or, at least, not yet unkind) strangers.

As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals.

Chart of U.S. national debt holders, domestic and foreign

Of about $11 trillion in U.S. debt, foreigners have about $3.8 trillion, with China in the lead at nearly $1 trillion and Japan not far behind at around $750 billion.
Most likely, though, this trend has already leveled off. The Chinese, Japanese, Russians, and Indians have openly announced their decision to cut back on further purchases and existing holdings of U.S. government debt. Beyond that, the source of funds previously allocated to their purchases — trade surpluses — has declined sharply with the recession. As a consequence, going forward, foreign buying is more apt to shrink than increase.
While foreigners are continuing to show up for the record-sized Treasury auctions, it’s due to the dollar retaining its status (albeit shakily) as the world’s reserve currency. But they have become quite cautious, generally investing towards the front end of the yield curve, which is a vote of no confidence in the buck’s future. As the chart below illustrates, sales of long-term bonds to foreigners are way down.

Treasury bond sales graph

So what does all this mean?

It means that a big chunk of our prosperity during the past twenty years was due to a trade deficit that put billions of dollars into the hands of foreigners, who then turned around and bought Treasuries with them, helping the U.S. government finance its massive deficit spending. That’s over — and the unwinding process has just begun.

Yet federal deficit spending, far from reflecting this reality, has grown by leaps and bounds. But who will finance it? Let’s extend our first chart out a few years.

Projected U.S. Debt

As you can see, we project that foreign participation has plateaued. U.S. private domestic investors can probably increase their holdings moderately, now that households are consuming less and saving more, and financial institutions have money to invest in Treasury paper. The agencies and trusts (like Social Security) are really not a part of the equation, but rather reflect programs on “auto-pilot” and quickly headed to the point where they will negatively impact, not help, the deficits.
Adding it all together, even under the most conservative of assumptions, there are simply not enough buyers to cover the accelerating federal deficits. That leaves the lender of last resort, the Federal Reserve, as the only remaining candidate to satisfy the government’s grotesque appetite for funding. There is no viable alternative.
The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must.
The editors of The Casey Report have been alerting subscribers to this very possible scenario for quite some time. If foreigners stop buying U.S. government debt, the whole house of cards will come crashing down. But you can do a lot to protect yourself financially – run with the trend instead of swimming against it. Find out more about the accurate predictions of trend hunter Doug Casey and his team, and how to profit from them . . . click here.

An article in the English-language of the German der Spiegel newspaper reported that the billion-dollar Sovereign Wealth Funds (SWFs) have lost up to 25% of their value – depriving the markets of a major cash source.

For those of you unfamiliar with SWFs, they are state-owned investment houses whose charter is to protect any budget surplus with prudent investments. The commodity boom of the past few years has filled the coffers of SWFs rich in raw materials such as oil, natural gas and metals.

Thought to be impervious to market swings, SWFs were held up as secretive groups with an uncanny knack for finding the best investments. That reputation blew up, however, when SWFs started to prop up Merrill Lynch, Citigroup and other big investment banks that ultimately lost a bundle.

These once-infallible mega-investors are now liquidating as they try to save their butts. In the process, money that they would have allocated to major investment projects such as commercial real estate, banking, oil exploration and other cash-intensive endeavors is simply going away.

The implications for both emerging and industrialized markets are profound, fueling speculation that the economic malaise could last longer than previously anticipated.

The article in der Spiegel reports that Norway’s $300 billion Government Pension Fund-Global, was down 7.7 percent in the September quarter. It was the worst performance in the 18-year history of the fund, which invests Norway’s oil revenues.

All told, SWFs have lost 18% to 25% this year alone, according to der Spiegel story. That could mean some $700 billion in cash has been taken out of the global investment pool.

The Abu Dhabi Investment Authority, perhaps the world’s biggest SWF, may have lost up to one-third of its $900 value, the German newspaper said. Things were bad in other Mid-East SWFs as well.

The Kuwait Investment Authority lost about 30% of its $250 billion reserve, although $50 billion of those losses may have been recouped with a new infusion of oil money. The Qatar Investment Authority is thought to be down 20% in 2008.

As the recession continues, where will new money come from? Well, it seems that taxpayers are picking up where the oil sheiks left off with bailout campaigns going on all over the world.

You can hardly find a seat at the best restaurants in the capital, Caracas, these days. They’re always packed… the art galleries are rammed … and the whisky importers have never had it so good. ..

Out on the streets there are so many luxury 4×4s on the road you could almost be in Chelsea! No doubt about it, Venezuela’s economy is booming.

And I’d like to show you how to position yourself to profit from it!

My next Profit Hunter recommendation is a clever way serious investors could profit from this boom.

More on that in a moment. First, let me explain why Venezuela is the fastest growing major economy in Latin America…

Why I believe the boom has a long, long way to go

It grew by 8% last year and 10.3% in each of the two years before… and by 18.4% the year before that…

That’s the kind of growth you can expect when you are the world’s sixth biggest oil exporter and the price of oil just keeps hitting new highs.

Here at Profit Hunter, I’ve long emphasised we are now in the era of $100 oil. And in fact, by some measures, Venezuela is sitting on top of more oil than Saudi Arabia.

It’s just one reason why the boom in Venezuela still has a long, way to go.

You see, it isn’t just a small group of people who are benefiting from all this new money. According to the IMF, the average Venezuelan should have an income of $10,169 this year. That’s up from $5,427 just three years ago. And it makes them richer than the Brazilians, the Argentineans, the Chileans and the Mexicans – the countries that get all the attention from international investors.

Venezuela ’s share market offers good value as well…

The Venezuela Stock Exchange Index is trading at a price to earnings ratio of less than five and it’s yielding about 9%. Yet most of the big international investors have been afraid of going in!

Of course you can’t blame them. The international media has been focussed on Chavez’s nationalisation of some of the big foreign-owned companies’ assets in the country.

But the truth is Chavez hasn’t been as bad for business as he sounds. The signs of new money that you see everywhere don’t quite gel with Chavez’s socialist rhetoric.

Just listen to his former chief of staff, retired general Alberto Rojas…

In an interview with The Economist last year Rojas explained that “some of Chávez’s speeches are for the gallery… and I’ll give you an example: the attack on the bourgeoisie.”

Chavez may have declared that being rich is bad, but Rojas pointed out that banks, “the most extreme expression of the bourgeoisie”, have actually been “the most favoured sector” of the economy since Chávez swept into power in 1999.

So much for all his bombast about the need for “petroleum socialism”!

A real undervalued gem

Don’t get me wrong though…

Venezuela isn’t some paragon of capitalism waiting to be discovered by intrepid investors. A lot of the new money has ended up with people with close political connections to the regime. They call them the “boligarchs” after Chavez’s “Bolivarian Revolution”, which named for the country’s independence hero .

But there IS good money to be made in Venezuela if you know what you’re doing.

And the exclusive report I’m preparing for Profit Hunter members reveals a groundbreaking company that knows EXACTLY what it’s doing.

It’s a real undervalued gem that’s slipped under-the-radar of the wider investment community.

If you’d like to take trial membership to my service you’ll see that this company hasn’t put all its eggs in one basket. It has big operations in Venezuela and its profiting from its growing wealth. But it operates in other fast growing markets as well.

I’m working on this report right now, but all the details will be with members very soon. So if you’d like to sign-up, click here now. You’ll get another great opportunity to act on right away on doing.

The money really is flowing east. Now’s the time to act!

Regards,

Manraaj Singh
Editor Profit Hunter