China CAN'T dump U.S. Treasuries

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grl's picture
grl
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China CAN'T dump U.S. Treasuries

I wonder if anyone can enlighten me on Mish’s comments at his recent Google Tech Talk, posted on the June 7th's Daily Digest :

when he was asked by a member of the audience when China will stop buying U.S. Treasuries (at 32:36). His answer, if I might paraphrase:  

 

China must buy us treasuries because the U.S. is running a deficit and by definition, if the U.S. is running a deficit, some other country, say China, must be running a surplus. So China is getting $’s in return and what are they doing with those $’s? Somebody might say, “Well, Why doesn’t China buy oil with those $’s?” So what then does Saudi Arabia then do with those $’s? Those $’s are circulating around and eventually they have to come home. The way those $’s come home is China buys U.S. assets –right now that is U.S. Treasuries, but eventually China is going to be buying U.S. businesses. That’s how the $’s come home, but as long as there is a deficit out there, by definition, China can’t dump US treasuries. Mathematically, China or someone must be accumulating US $’s or US $ assets by the very fact that we are running trade deficits with most of the world.

 

My first reaction was, yeah, but isn’t the Federal Reserve Bank also monetizing that debt by also buying U.S.Treasuries - but I suspect I have that wrong because surely he would have mentioned it as part of the equation. Is there anyone out there who understands this fairly arcane subject (at least to me) who cares to comment on Mish’s comment or who can direct me to further enlightenment?   Thanks!

 

 

 

Farmer Brown's picture
Farmer Brown
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Re: China CAN'T dump U.S. Treasuries

 I think Mish defeats his own deflationist argument in saying this.

What he is saying is that all foreign-held US dollars must be invested in US Treasuries, or eventually come home to the US to buy assets or goods and services.  They "must" be invested in US Treasuries because there is simply nothing else for a foreigner to do with excess dollars.  Yes, they could be spent on commodities, or buying assets in some other country, in dollars, but then the recipient of those dollars must place them in some investment.  The "parking lot" for all dollars, when they cannot be put towards any immediate purchases, are US Treasuries, because there is always a supply of them and they pay a return.

So the term to "dump" US Treasuries doesn't make a whole lot of sense unless you think the owner of those dollars will invest them in the US.  When foreigners come to believe that is the best thing to do with their dollars, then you'll see a Treasury "dumping", and hyperinflation will surely start in the US with all those dollars coming home. 

 

So, I do not understand Mish's deflationist position, especially given his own observations about the false notion of dumping treasuries. It's not a false notion at all.  It's just false to believe it could happen fully outside the US.  Eventually those dollars have to come home, one way (through Treasuries) or the other (buying US assets).  

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DavidLachman
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What will China buy with its Dollars?

Dump is not a very useful term in this discussion.  It implies a that there is a buyer of the Treasuries that China (or anyone else) would dump.  Most of the Treasuries out there are short term, 2 years or less, so I guess dumping really means letting them mature and getting dollars from the Treasury (by the way a ridiculous word for an insolvent country to use, there is no treasure there).  Then, as Patrick and Mish point out, the next investment to make with the dollars is to buy things denominated in dollars, which, especially in the climate described, would mean they would return to the US in the form of a buying spree.   Will this result in Hyperinflation, or a return to business a usual?  Let's see:

I guess housing is really our major asset that if for sale right now (and auto makers, and soon empty malls).  If China buys every available house that is vacant or in forclosure in the US that should take a big chunck of the 2 trillion or so that they have to spend (heck, if they put 2 trillion down, we could give them a mortgage on 10 trillion of housing--no questions about income either).  Then they could send extra population to the US to live in their newly aquired houses, maybe retired folks and party members who did there jobs well or they could have a lottery to decide who would go--it isn't really important how they decide, just that the houses have Chinese people living in them.  Those people would be getting money sent to them every month for living expenses and that could be the engine of our economic recovery and a return to business as usual, that includes a housing price recovery to 2006 (or higher) levels, at which point the Chinese could slowly sell their houses in an orderly way, or keep them as the basis of their retirement system (thats what we were using them for after all).  A win-win situation. 

The only problem is we can't be sure that the Chinese will buy houses with their two trillion dollar nest egg.  I suspect they will buy something more useful than houses, like productive assets, mines, agricultural land, forests, energy companies, key technology companies, universities, national monuments, etc.  Things that might be a good basis for their retirement system too!

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Farmer Brown
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Re: China CAN'T dump U.S. Treasuries

In a sense, the Chinese are already "dumping" bonds - they are dumping long-term bonds and putting the money into short term bonds or cash.  That's why longer-term bond rates are going up.  It's a slow process, to be sure, but there is no doubt they and others are piling onto the short-end of the curve.  We could wind up like England, with 90% of its debt due "by Christmas", as Chris showed on in the in-session thread for June 8th yesterday.

That by itself will and is having a big effect on our economy, by pushing mortgage rates up and setting up another wave of mortgage defaults rippling through the economy. 

That will also increase our country's monthly "credit card" payment - the interest we must pay every month for all our borrowing.  And, just like a family that's overextended itself and has had its rates hiked, we will wind up spending all or almost all of our "disposable" income on interest payments to our bond holders.

That will lead to a very slow economy, or to further printing by the Fed.  My bet is more on the latter, which will spur further rate hikes.  As Chris says, rinse and repeat.

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Re: China CAN'T dump U.S. Treasuries
Patrick Brown wrote:

In a sense, the Chinese are already "dumping" bonds - they are dumping long-term bonds and putting the money into short term bonds or cash.  That's why longer-term bond rates are going up.  It's a slow process, to be sure, but there is no doubt they and others are piling onto the short-end of the curve.  We could wind up like England, with 90% of its debt due "by Christmas", as Chris showed on in the in-session thread for June 8th yesterday.

Patrick I agree with you, but they are not only converting bonds they are using the cash to by hard commodites ((oil, metals, etc.)).  However when the day ends and the converting game is over and no one wants sell you stuff and take USD than the real inflation happens.

An interesting source gives the start of this "Death of the Dollar" ((meaning as a world reserve currency)) as November this year.

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Russ_H
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Re: China CAN'T dump U.S. Treasuries

Not as such. I thought the plan seemed to be to use the US treasuries as collatoral for a loan, use the loan to buy commodities and if the dollar tanks then default on the loan. The creditor is then left with the worthless treasuries and the winner walks off with the real assets. However, I may have misunderstood how things work.

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Doug
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Re: China CAN'T dump U.S. Treasuries

Here's how I visualize what's going on.  Please pick it apart.  China has a lot of dollars.  So does Treasury and so do the banks.  I think there's a general realization that if those dollars were released into circulation in any quantity, the value of the dollar will immediately start being devalued.  That, in turn, would open the flood gates of everyone trying to get rid of dollars before they lose their metaphorical shirts.  That's why all that alphabet soup money is still sitting in banks and why China is afraid to start spending their dollars too quickly.  They are looking for assurances from the US that banks, Treasury and the Fed won't start putting too much of their money into circulation.  Meanwhile, China is probably spending its dollars in dribs and drabs that won't attract too much attention.  Once the flood gates open, it may turn into a race to the bottom.

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