Why the security spending spree?

October 15, 2008 2:00 PM

Coming across this, it looks like the UK has over the past year bought $220bn in US Treasury Securities. I'm curious. Can anyone explain the reason? (or connect this to a specific political decision made by the UK government) Because I'm struggling...
posted by cgfoz to law & government (8 comments total)

You seem to be interpreting that as "the government of the United Kingdom". It's not. It's the government, PLUS all of the private money that is run out of London, the Caymans, etc.
posted by milkrate at 2:18 PM on October 15, 2008

(exclude Caymans, as that's a Caribbean banking center)
posted by milkrate at 2:19 PM on October 15, 2008

Many governments buy U.S. T-bills for the same reason you as an individual might buy some. They're a relatively safe investment and thought of as very high-quality debt, they pay a decent amount of interest, and by being denominated in dollars they expose you to USD-versus-local-currency fluctuations (which can be a good or bad thing, depending).

I don't think it's necessarily an endorsement of U.S. politics generally; there are undoubtedly lots of countries with governments that are not fans of the U.S. that hold Treasury notes as reserves. I don't think it's necessarily a cabal to prop up the U.S. or anything.
posted by Kadin2048 at 3:00 PM on October 15, 2008

Part of the picture is the declining dollar. As the dollar declined in value recently, one pound could buy more dollar-denominated debt than it used to.
posted by Pants! at 3:02 PM on October 15, 2008

Isle of Man, and Jersey, are offshore banking centers.

The money in t-bills is likely OPEC money.
posted by troy at 4:12 PM on October 15, 2008

Milkrate has it. There is a ton of offshore money parked in the UK for a variety of reasons.
posted by shothotbot at 8:26 PM on October 15, 2008

I agree that this reflects private investment and not the UK government.

It is, however, true that the US and UK have closely coordinated their monetary policies for half a century. See in particular the Bretton Woods system, in which a larger group of the WWII allies basically agreed to protect each others' currencies. During and leading up to the Depression, there had been a series of "runs" on currencies not unlike the Iceland collapse this month, effectively treating an entire country like an insolvent bank, and leading to eroded trust in the international monetary system, which further suppressed recovery. Under Bretton Woods, there was coordination amongst the central banks intended to avoid this. It worked for a number of years, but in the 1970s evolved into a less stringent system. The UK and US have remained close, though.

Additionally, you can't underestimate the importance of the US banking system to the rest of the world. The Fed and Treasury, when they act, have global influence. Holding T-bills makes as much sense for a central bank as for a private one. It's a hedge against whatever may come, a bit of backstop security.

I hope that answers your secondary question about policy.
posted by dhartung at 10:49 PM on October 15, 2008

Another possible reason is the private investors that previously had their money in mortgage-backed securities. Many mortgage-backed securities were "AAA rated", i.e. believed to be comparably secure to US Treasury Securities, but with higher interest.

As savers have realised that mortgage-backed securities are not as robust as previously thought, it makes sense that people looking for stability would go somewhere else. And there aren't many investments more secure than boring, low-interest US Treasury Securities.
posted by Mike1024 at 3:16 AM on October 16, 2008