Sunday, June 24, 2018

Could Trump's Destabilazation Agenda Make U.S. Treasury Bonds Less Safe?


A Step Backward by Nancy Ohanian

Russia isn't one of the biggest holders of U.S. Treasury bonds-- and they became a much smaller holder recently. The Treasury report for April has published about a week ago and it showed that Russia sold about half it's holdings-- $47.4 billion out of the $96.1 it held. Russia had already sold off $9.3 billion in February and another $1.6 billion in March. Russia had gone from the 16th biggest hold of bonds to the 22nd biggest in just a month. For those who feared that Trump's trade was might cause a sell-off on Treasury bonds... their fears may be justified. In April Ireland sold off $17 billion, Japan sold $12 billion and China, our biggest creditor, sold $7 billion. At the end of April these were the 2 dozen biggest holders of U.S. treasury bonds:
China- 1,181.9 trillion
Japan- 1,031.2 trillion
Ireland- 300.4 billion
Brazil- 294.1 billion
U.K.- 262.7 billion
Switzerland- 242.2 billion
Luxembourg- 213.9 billion
Hong Kong- 194.0 billion
Cayman Islands- 180.7 billion
Taiwan- 168.1 billion
Saudi Arabia- 159.9 billion
India- 152.8 billion
Belgium- 137.6 billion
Singapore- 118.0 billion
South Korea- 100.1 billion
Canada- 89.4 billion
Germany- 86.0 billion
France- 82.5 billion
' Bermuda- 64.7 billion
Thailand- 60.8 billion
United Arab Emirates- 59.7 billion
Russia- 48.7 billion
Sweden- 45.1 billion
Kuwait- 42.6
The reason China has all those Treasuies is because they have no choice but to accept payment for goods that cause the surplus between us in dollars. Were they to convert dollars into renminbi, their own currency, it would make the renminbi stronger, making their goods less competitive. So they recycle all those dollars back into the US economy by buying Treasuries, which also gives them interest. Were China to sell off its treasury bonds it would likely hurt them more than it would hurt us-- unless other countries didn't want to buy them, unlikely... unless Trump actually triggers a real trade war.

Not everyone agrees. A couple of days ago Stephen Roach, former chairman of Morgan Stanley Asia, currently teaching economics at Yale, was on CNBC talking about the risks of a China sell-off. "We depend on China to fund our budget deficits, which as you know are going to get bigger and bigger. If they just reduce their buying at a time when we are increasing our supply of new Treasuries into the market that could lead to a real rout in the bond market."
Earlier Wednesday, China announced additional tariffs on 106 U.S. products. The move came less than 24 hours after President Donald Trump unveiled a list of Chinese imports the administration plans to target as part of what the president deems unfair trade practices.

Treasury purchases have not been brought to the table, but some fear that could come to pass if tensions escalate.
Russia's holdings of Treasury bonds wouldn't even be felt by the U.S. economy, even if they sold them off in one day-- although it might hurt Russia. If however other countries follow Russia's lead... well, think of that massive deficit Trump and the Republican Congress just put in place with the tax scam. WHo's going to pay for that? Republicans already want to cut Medicare, Medicaid and Social Security. Would they have to cut the safety net even more?

Earlier this month, Arkady Savitsky wrote for the Strategic Culture Foundation (slightly right of center but factual) that "the supremacy of the US dollar is not as solid as many people believe it is. A sell-by date as a global reserve currency is looming. The process of de-dollarization is gradually gaining momentum. Moscow and Beijing are making agreements to move away from the American currency. On June 8, their leaders signed an agreement to raise the share of trade settlements in national currencies. Last year, nine percent of payments for supplies from Russia to China were made in the Russian rubles. In October 2017, China launched a payment system for transactions in the renminbi and the Russian currency. The launch of the petro-yuan allows Moscow and Beijing to use national currencies for settlements.
The worse the US relations with other countries become, the more likely are other nations to reconsider their reliance on the dollar. The US bonds market is going through hard times, the dollar is facing uncertain future and gold is becoming the best investment one could think of. With sanctions constantly used as a tool of foreign policy, trade wars waged, and the huge debt growing, America’s economic prospects are clouded in doubt to make other countries gradually move away from its currency and T-bonds. It does not augur well for the US. Its policy of confrontation makes it weaker, not stronger. There are clear signs the American century is coming to an end.

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At 6:01 AM, Anonymous Anonymous said...

The destabilization pogrom isn't going to help, but the biggest factor in making our T-paper less attractive is our mushrooming debt and our addiction to a massive trade imbalance.

Investors in our T-paper, whether by choice or by necessity (as in China and OPEC nations), once were reassured that our massive economic potential would pay off for them as the US sold the world its food and manufactured goods.
Today, those investors are relying on the Treasury's willingness to create more currency in order to cover the interest on this debt, which makes that debt even bigger.

The interest is still very low, so the amount it adds to our debt isn't crippling... yet.

But it *IS* unsustainable. It's been unsustainable since Reagan started the trend in 1980. It was unsustainable in the Clinton admin, who WAS able to balance the budget only one year. It was so when the bushbaby blew the shit out of it with his tax cuts. It was so when obamanation gave a half trillion to finance and the rich in 2009. And it's been injected with steroids with trump's tax cut.

Those still "investing" in our T-paper are doing so knowing that their loans are being transferred directly to our obscenely rich (because we don't tax them).

It has to blow up some day. The fuse will either be lit by the trumpster fire or it SHALL spontaneously combust of its own inertia at some point.

China could set the match simply by calling in its trillion+ loan. But they are far too circumspect to do that summarily. They know it would hurt them and also start a global depression. But when, not if, it implodes on its own, they'll be no better off for their caution. I suspect they know this also.

At 5:03 AM, Anonymous Anonymous said...

The support for the dollar remains somewhat strong, but cracks are showing. The more Trump pushes for conflict, the more rapidly that base will deteriorate. While I don't wish the kind of misery an economic collapse would impose upon innocent people, the time to prepare that that eventuality is now. The odds that Trump will pull down the Economic Temple upon his own head (and by extension, everyone else's) grow daily.


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