What If China Dumps US Treasury Bonds?

[Kimura]

Yves here. While I agree with Wray’s post, there’s a small caveat I wish he had included: China will continue to take US dollars as long as it exports to the US. There does not appear to be any near or intermediate term risk of that changing. Ironically, the US and other advanced economies have been urging China to rebalance, as in generate more of its demand for its manufacturing capacity internally and export less. China has not made much progress in that direction. Japan was also encouraged in the 1980s to become more consumer driven. Instead they managed to engineer an bubble and bust, and only Abenomics (not necessarily by design) has led to a reversal of the island nation’s long-standing trade surpluses.

By Randy Wray, a professor of economics at the University of Missouri, Kansas City.

Our deficit hysterians love to raise the specter of China. Supposedly Uncle Sam is at the mercy of the Chinese, who have a stranglehold on the supply of dollars necessary to keep the US government above water. If the Chinese suddenly decided to stop lending those scare dollars, Uncle Sam would be forced to default.

Can anyone, please, explain to me how the sovereign issuer of the US dollar—Uncle Sam—could ever run out of his supply of dollars? Please, give me one coherent explanation of how that could happen.

And please explain to me how China got those dollars in the first place. So far as I know, every single dollar the Chinese have comes from the USA. There are two sources: US lending and US spending. China loves the second: Chinese work hard to produce stuff to sell to America so they can get dollars.

Folks, all the dollars the Chinese have came from the US. There is no net supply of dollars from China.

They get dollars from net exports to the US. These end up at the Bank of China. The Bank of China rationally prefers to earn interest on dollar holdings, so these are converted to US treasuries. This is nothing more than a balance sheet operation on the books of the Fed: Bank of China reserves at the Fed are debited and Bank of China treasuries are credited. There’s no net flow of dollars to the US Treasury.

If the fear mongers are correct, China might decide to reverse that operation: exchange the treasuries for reserves at the Fed. And then, who knows what. Maybe China will choose to buy Greek treasuries?

I doubt it, but so what. There are plenty of holders of Greek treasuries who want to unwind into the safest asset in the world—Uncle Sam. If China wants to play the dupe, there are plenty of others willing to take the other side. (Hint: China ain’t the dupe. Maybe some US hedge funds want to play dupe?)

Worst case scenario? The US dollar might depreciate against some other currency. That’s a long-shot but it could happen. Will that push up US interest rates? Doubtful. The US Fed determines the short rate, and the global search for safe assets plus expectations of future US Fed policy determines the longer rates.

Guess what. As we head into the next GFC, the US continues to look awfully good. Don’t bet against the dollar or US interest rates. Uncle Sam wears the biggest pants in the world.

Krugman continues to inch away from ISLM thinking and toward MMT. Witness his latest post:

Who’s Afraid of China?

But the crucial point, which Mr. Yglesias touches on only briefly at the end, is that whatever China’s motives, the Chinese wouldn’t hurt us if they dumped our bonds – in fact, it would probably be good for the United States.

But, you say, wouldn’t that send interest rates up and depress the American economy? I’ve been writing about this issue a lot in various guises, and have yet to see any coherent explanation of how it’s supposed to work. Think about it: China’s selling American bonds wouldn’t drive up short-term interest rates, which are set by the Federal Reserve.

It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy up those bonds. It’s true that such actions could possibly depress the value of the dollar. But that would be good for America!

Right! Again, I doubt any significant dollar appreciation will occur. The US, as a sovereign currency issuer, faces no financial constraint. It cannot be forced into default. It controls its policy interest rate.

The rest of the world are users of the dollar, not issuers. They can never hold us hostage.

Read more at Randy Wray: What If China Dumps US Treasury Bonds? Paul Krugman Inches Toward MMT « naked capitalism

 

[Kimura]

Personally, I doubt the dollar exchange would be affected in a negative fashion if this were to occur. The dollar could get stronger as the Chinese and others in the foreign sector purchase real goods and services from the US.

 

[Zander]

The American financial system, despite all it's existing problems, remains the most stable and low-risk in the world.

 

[Kimura]

The American financial system, despite all its existing problems, remains the most stable and low-risk in the world.

I posted this because people somehow think the US government has to borrow its own fiat as a currency issuer. Some people think there's a dollar factory on the outskirts of Beijing or something. It's become a meme of sorts that's parroted on a daily basis.

 

[oldfart]

The American financial system, despite all its existing problems, remains the most stable and low-risk in the world.

I posted this because people somehow think the US government has to borrow its own fiat as a currency issuer. Some people think there's a dollar factory on the outskirts of Beijing or something. It's become a meme of sorts that's parroted on a daily basis.

Another way to think of it is that most nations including Germany are trying to maintain and increase trade surpluses through currency markets. Just as it is mathematically impossible for everyone to run a trade surplus with no one having a trade deficit (we sell our exports to who?) it is impossible for everyone to simultaneously devalue their currency to increase exports. If everyone is practicing austerity, who is generating the demand to fuel a recovery? This is the weakness of the German position; by refusing to lower their trade surpluses they cripple the ability of the Eurozone to recover. Both sides of the Atlantic had a housing boom and bust; but the beyond that Europe has been unable to recover because of its currency structure and America has been unable to recover because of forty years of upward redistribution and a credit bust.

 

[Toro]

I always thought the end game to all this might be a currency crisis.

The Chinese dumping US Treasuries in a chaotic manner might trigger one.

 

[JakeStarkey]

What If China Dumps US Treasury Bonds?

No reason, none, to believe that will happen. Move on, Ives.

 

[Kimura]

The American financial system, despite all its existing problems, remains the most stable and low-risk in the world.

I posted this because people somehow think the US government has to borrow its own fiat as a currency issuer. Some people think there's a dollar factory on the outskirts of Beijing or something. It's become a meme of sorts that's parroted on a daily basis.

Another way to think of it is that most nations including Germany are trying to maintain and increase trade surpluses through currency markets. Just as it is mathematically impossible for everyone to run a trade surplus with no one having a trade deficit (we sell our exports to who?) it is impossible for everyone to simultaneously devalue their currency to increase exports. If everyone is practicing austerity, who is generating the demand to fuel a recovery? This is the weakness of the German position; by refusing to lower their trade surpluses they cripple the ability of the Eurozone to recover. Both sides of the Atlantic had a housing boom and bust; but the beyond that Europe has been unable to recover because of its currency structure and America has been unable to recover because of forty years of upward redistribution and a credit bust.

Indeed!

The prevailing theory is if we get Zee Germans to inflate domestically and increase aggregate demand, this will give the periphery options, as opposed to continued internal devaluation, wage cuts, etc.

Wolfgang Schäuble is on board. Public sector workers received wages increases and now private sectors workers are agitating for the same.

Click Here

It looks as if Zee Germans are ready to do whatever it take to save the euro zone. However, they are limited to how the euro zone is structured. Zee Germans are willing to accept an increased inflation target when it fiscal policy is that of contraction and the ECB's sole mandate is to keep inflation on the low side.

 

[Zander]

I always thought the end game to all this might be a currency crisis.

The Chinese dumping US Treasuries in a chaotic manner might trigger one.

I doubt it. What would they exchange it for?

 

[Toro]

I always thought the end game to all this might be a currency crisis.

The Chinese dumping US Treasuries in a chaotic manner might trigger one.

I doubt it. What would they exchange it for?

I doubt it too.

But the odds aren't zero.

 

[Kimura]

I always thought the end game to all this might be a currency crisis.

The Chinese dumping US Treasuries in a chaotic manner might trigger one.

I doubt it. What would they exchange it for?

They would have to exchange those dollars for real goods and services produced by Americans. This is the only way for them to get rid of their dollar holdings. We'd also go from having a trade deficit to having a trade surplus over the duration of this Chinese shopping spree.

 

[OnePercenter]

Depends. Are they mature yet?

 

[oldfart]

I always thought the end game to all this might be a currency crisis.

The Chinese dumping US Treasuries in a chaotic manner might trigger one.

Lots of folks have a gut feeling like that, but I can't find a mechanism where that happens. China will continue to export to the United States and accumulate dollars. If they decide to sell Treasury securities, they will accumulate even more dollars. What will they do with them; buy Euros? Whatever currency they decide to buy will increase in price as the dollar falls. The falling dollar makes their holdings of dollars and Treasuries both worth less, makes Chinese goods more expensive in the US (reducing their export surplus) and America goods cheaper in China (increasing their imports); all of which helps the US and hurts China.

I suppose that a really smart China might step up dollar purchases of assets, especially raw material property, in Africa and Latin America, but I think they are already doing that as fast as they can.

If China decided to dump all Treasuries on the open market, the Fed would simply buy them with dollars and the Chinese would have traded interest bearing dollars for non-interest bearing dollars. Where do they go from there?

 

[asterism]

Yves here. While I agree with Wray’s post, there’s a small caveat I wish he had included: China will continue to take US dollars as long as it exports to the US. There does not appear to be any near or intermediate term risk of that changing. Ironically, the US and other advanced economies have been urging China to rebalance, as in generate more of its demand for its manufacturing capacity internally and export less. China has not made much progress in that direction. Japan was also encouraged in the 1980s to become more consumer driven. Instead they managed to engineer an bubble and bust, and only Abenomics (not necessarily by design) has led to a reversal of the island nation’s long-standing trade surpluses.

By Randy Wray, a professor of economics at the University of Missouri, Kansas City.

Our deficit hysterians love to raise the specter of China. Supposedly Uncle Sam is at the mercy of the Chinese, who have a stranglehold on the supply of dollars necessary to keep the US government above water. If the Chinese suddenly decided to stop lending those scare dollars, Uncle Sam would be forced to default.

Can anyone, please, explain to me how the sovereign issuer of the US dollar—Uncle Sam—could ever run out of his supply of dollars? Please, give me one coherent explanation of how that could happen.

And please explain to me how China got those dollars in the first place. So far as I know, every single dollar the Chinese have comes from the USA. There are two sources: US lending and US spending. China loves the second: Chinese work hard to produce stuff to sell to America so they can get dollars.

Folks, all the dollars the Chinese have came from the US. There is no net supply of dollars from China.

They get dollars from net exports to the US. These end up at the Bank of China. The Bank of China rationally prefers to earn interest on dollar holdings, so these are converted to US treasuries. This is nothing more than a balance sheet operation on the books of the Fed: Bank of China reserves at the Fed are debited and Bank of China treasuries are credited. There’s no net flow of dollars to the US Treasury.

If the fear mongers are correct, China might decide to reverse that operation: exchange the treasuries for reserves at the Fed. And then, who knows what. Maybe China will choose to buy Greek treasuries?

I doubt it, but so what. There are plenty of holders of Greek treasuries who want to unwind into the safest asset in the world—Uncle Sam. If China wants to play the dupe, there are plenty of others willing to take the other side. (Hint: China ain’t the dupe. Maybe some US hedge funds want to play dupe?)

Worst case scenario? The US dollar might depreciate against some other currency. That’s a long-shot but it could happen. Will that push up US interest rates? Doubtful. The US Fed determines the short rate, and the global search for safe assets plus expectations of future US Fed policy determines the longer rates.

Guess what. As we head into the next GFC, the US continues to look awfully good. Don’t bet against the dollar or US interest rates. Uncle Sam wears the biggest pants in the world.

Krugman continues to inch away from ISLM thinking and toward MMT. Witness his latest post:

Who’s Afraid of China?

But the crucial point, which Mr. Yglesias touches on only briefly at the end, is that whatever China’s motives, the Chinese wouldn’t hurt us if they dumped our bonds – in fact, it would probably be good for the United States.

But, you say, wouldn’t that send interest rates up and depress the American economy? I’ve been writing about this issue a lot in various guises, and have yet to see any coherent explanation of how it’s supposed to work. Think about it: China’s selling American bonds wouldn’t drive up short-term interest rates, which are set by the Federal Reserve.

It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy up those bonds. It’s true that such actions could possibly depress the value of the dollar. But that would be good for America!

Right! Again, I doubt any significant dollar appreciation will occur. The US, as a sovereign currency issuer, faces no financial constraint. It cannot be forced into default. It controls its policy interest rate.

The rest of the world are users of the dollar, not issuers. They can never hold us hostage.

Read more at Randy Wray: What If China Dumps US Treasury Bonds? Paul Krugman Inches Toward MMT « naked capitalism

China cannot dump US Treasury bonds. The bonds they own are not available on the open market and if they are transferred the bonds become null and void.

But even if they could, it would do nothing but undercut their own position.

China's Investment Alternatives

 

[asterism]

I always thought the end game to all this might be a currency crisis.

The Chinese dumping US Treasuries in a chaotic manner might trigger one.

Lots of folks have a gut feeling like that, but I can't find a mechanism where that happens. China will continue to export to the United States and accumulate dollars. If they decide to sell Treasury securities, they will accumulate even more dollars. What will they do with them; buy Euros? Whatever currency they decide to buy will increase in price as the dollar falls. The falling dollar makes their holdings of dollars and Treasuries both worth less, makes Chinese goods more expensive in the US (reducing their export surplus) and America goods cheaper in China (increasing their imports); all of which helps the US and hurts China.

I suppose that a really smart China might step up dollar purchases of assets, especially raw material property, in Africa and Latin America, but I think they are already doing that as fast as they can.

If China decided to dump all Treasuries on the open market, the Fed would simply buy them with dollars and the Chinese would have traded interest bearing dollars for non-interest bearing dollars. Where do they go from there?

China has a real problem. Their population is triple ours but their GDP is only about 2/3 the size of ours. The reason they own so much US debt is because they have no other alternative. That doesn't put them in control of us, it puts us in control of them.

 

[Politico]

They won't.

 

[editec]

I always thought the end game to all this might be a currency crisis.

The Chinese dumping US Treasuries in a chaotic manner might trigger one.

I suppose if the MASTERS of China were crazy they might do that.

Totally right, Tiro. International trade is China's RICEBOWL.

If they destroyed the US economy, they will also destroy their own.


THE NEW CHINESE BILLIONAIRES IN THE CHINESE ARMY don't want to go back to the bad old days of REAL COMMUNISM.

Neither do the people of China.

 

[Mac1958]

.

China owns about $1.2T of our treasuries, and I guarantee ya, we know it. Supposedly during the meltdown, Russia approached them about getting together and dumping treasuries at the worst possible time. We're essentially like a doll on a string for them, and the only thing saving our asses is the symbiotic nature of the global economy. If and when China needs us less, we're a sitting duck.

This is a self-inflicted wound, just like all our other problems.

.

 

[SteadyMercury]

I'd love to be a fly on the wall in the meeting where Chinese leaders decide the best move for their slowing export driven economy is to attempt to cripple the spending power of their biggest customers.

 

[Kimura]

.

China owns about $1.2T of our treasuries, and I guarantee ya, we know it. Supposedly during the meltdown, Russia approached them about getting together and dumping treasuries at the worst possible time. We're essentially like a doll on a string for them, and the only thing saving our asses is the symbiotic nature of the global economy. If and when China needs us less, we're a sitting duck.

This is a self-inflicted wound, just like all our other problems.

.

That's 1.2 trillion that the Chinese desire to save as US financial assets. They could sell their Treasuries, but in order to get rid of those dollar deposits, they would have to purchase real goods and services from Americans.

Trade deficits aren't inherently bad once we realize trade is a zero sum game. China sends us cheap products, in return that get a reserve account balance at the Federal Reserve. Our trade deficit basically means that other people are holding dollars besides Americans.