The Claim
The U.S. federal deficit projections…
Still wondering why countries are trying to get out of U.S treasuries? pic.twitter.com/LJEo3gB0Dq
— Gold Telegraph ⚡ (@GoldTelegraph_) April 3, 2020
Questions Abound
- What countries are “trying” to get out of treasuries?
- Is this something one has to “try” to do?
- Why can’t they just do it?
Do or Do Not, There is No Try
Why Can’t They?
The chart in the claim provides the answer.
The US continually runs a trade deficit and one of the reasons is the fiscal deficit.
Mathematically, a perpetual trade deficitforcescountries to accumulate US Dollar denominated assets.
Those assets do not have to be US treasuries, but imagine what would happen if China tried to buy Boeing or Apple.
Treasuries are the most liquid global asset and they do pay an interest rate, so treasuries it is.
From time to time China does sell Treasuries. But is not an attempt to get out of Treasuries . On the contrary, it has been a forced reaction to shore up a plunging Yuan.
There is “No Try”. Mathematically, there can’t be.
There are only idle threats.
Mike “Mish” Shedlock
There are many different scenarios in which foreigners could “get out” of treasuries, and all of them involve the devaluation of the US dollar.
For instance, foreign owners of the treasuries sell them, the Fed buys them, and then, with the US dollars they receive in exchange, the foriegners buy gold, oil, stocks, real estate, etc.
It’s perfectly true that at the end of the day someone, somewhere, owns the dollars. But relative to the value of other assets these dollars have now greatly diminished in value. Relative to the total value of all assets, the combined value of all US dollars in circulation has shrunk, perhaps drastically.
As a collector you can buy yourself a quadrillion Reichsmarks from the Weimar era – you own these things outright – but portion of your “portfolio” represented by them will be vanishingly small.
So we can’t assume as a matter of course that the system by which the US has funded its debt for the better part of the last century will necessary remain intact and/or stable – in fact it’s very dangerous to do so. It could very easily collapse altogether.
I read an article by a “Financial Journalist” that said the world was “dumping” $100 million of Treasuries. That’s 2 tenths of 1% of the average daily volume. Some “dumping”. Is there a country in the world that isn’t increasing its supply of its own currency? Probably, but none come to mind at this time.
The Chinese Communist Party has a currency. They are now #2 in GDP. They buy stuff all over the world. Why won’t the sellers of commodities accept their currency as payment? It’s not convertible.
You’ve got to investigate the possibility that after this (man made) financial calamity, to pay back the free money provided to the financial casinos, there would be calls for a financial transaction tax. There is no other way to fill the budget gap(s). This will be obviously opposed by the US, but other governments still care about budget deficits. This would effect the treasury market among other things.
At this stage of the game I’d much rather hold gold than US treasuries. Trump and Congress are already talking about another big stimulus package and we are early into this crisis.
What will the US Federal deficit be in 2020? $4 Trillion, $6 Trillion, perhaps even more? That’ll be a $30 Trillion national debt by 2021.
What if China started bartering prescription drugs for gold?
The expansion of the quantity of money in all major currencies is about to increase massively, in an attempt to control the economic consequences of the coronavirus.
How would it matter?
They could sell drugs for dollars and buy gold.
Zero difference
It seems they could use that threat as a weapon that would put them in the drivers seat for trade deals and push us toward an inflationary depression.
Mish,
China would have to pay an enormous premium above the current gold spot price, so them would want SOMEBODY ELSE to pay for that premium, not them, most specially if LARGE quantities of gold are involved.
China would happily sell us drugs for dollars only if large amounts of gold were obtainable at USD $ 1600 (approx.). No dice.
Nah the Chinese should barter medicine for the entire state of California. Together we’ll build a surveillance state that would make Hitler want to be born again.
On the plus side, self driving cars might arrive sooner than expected given the combination of Silicon Valley algorithm and Chinese driving data.
Mish, countries can dump US treasuries for other currencies or commodities, like gold and silver. I dont think this is happening yet, but if helicopter money continues it is a possibility.
Who buys the dollars?
Someone MUST mathematically hold every dollar.
Sorry if this is a dumb question, but doesn’t the Fed buy securities through QE? If Foreign governments started to stop purchasing/rolling over over treasury holdings wouldn’t the Fed be forced to come in and begin buying them?
Yes, but Mish’s point is that the USA has a constant trade deficit, so the creditor countries always accumulate dollars. They therefore need to purchase USD assets with those accumulated dollars. My point is that they will only do so at a price that reflects their confidence in the dollar and USA credit risk. If confidence is not good enough it will be pass the parcel until the price is right.
Alternatively, as you say, the Fed steps in and holds the price artificially high by buying the Treasuries via QE. The proceeds of those purchases are used to buy other assets or goods and services and the resulting dollars from those purchases end up in a bank account and are also on lent in a never ending circle. That is until someone withdraws the cash and puts it under their mattress. This is my take on it anyway -:)
True enough Mish, someone MUST mathematically hold every single dollar.
The problem would come about when the whole wide world ends up puking dollars on the Fed´s front lawn. At this rate, it won´t take much longer, probably in 2020…
What if China took their US dollars and bought gold?
Someone else has the dollars to spend.
What happens to the price of gold? What happens to the dollars purchasing power? The inflation genie is hard to get back in the bottle!
Yes of course, I agree. China has been buying Gold.
True, but its the value that’s assigned to dollars that matters. If it takes $3000 to buy an ounce that is a dumping of the dollar.
Sigh.
NO!
It is a repricing event
What matters is the rising price for PHYSICAL bullion, NOT paper gold re ETFs.
Please Enough!
The difference between paper gold an physical gold is about 1% if that.
for those who like paper gold…
even Bloomberg agrees LOL
The IMF has 1400 metric tons, Think they will sell it ? [Pelosi just gave them a bunch more money they have been asking for the past nine years.]
Does the IMF have 1400 metric tons of PHYSICAL gold ? Really ? Where does it keep it , exactly ? Are you sure ? Ever been audited since 1945 ?
While someone has to hold everyone of them, and trade deficits do ensure someone will, how much others are willing to give up, in exchange for one of them, can very easily be reduced.
Chinese producers previously willing to hand over three ventilators and a million N95 masks in exchange for given stack of treasuries, no longer being willing to hand over more than one of the former and a tenth of the latter, is till problematic.
Much of the world have been willing to accept US IOUs, because they believed there was something, anything, of value backing those IOUs. IOW, they’d eventually be able to get something of real value in exchange for them. The more obvious it becomes that this belief was erroneous, the less real goods and services each IOU is able to command. Which does effectively shrink the size of the treasury market, as log as you measure it in terms of anything other than nominal dollars (and other, dollar tracking, fiats).
“The more obvious it becomes that this belief was erroneous, the less real goods and services each IOU is able to command. “
…
Dig Deeper.
Why do you think we have military bases in well over a 100 countries? The US makes concerted effort to ingratiate themselves with other countries via trade deals / defense pacts / share intel / paying off leaders of pineapple countries / grants / low interest loans / etc. ALL done to keep the $US as the world’s currency reserve.
Maduro would no doubt want the same privileges.
Only difference being, Maduro don’t have ancestors who left behind enough wealth to enable him to afford doing so despite he himself being almost as incompetent as current US ruling classes.
When you are too retarded to do anything at all useful with it, even the largest inheritance eventually runs out, though…..
The reason US Treasuries are still saved up and not dumped for gold is that the US dollar continues to be the world´s reserve currency… until it isn´t.
The time is ripe for 50% gold-backed SDRs.
…”… When the wealthiest country in the world is unable to produce basic medical gear to cope with a rampaging pandemic, it is dealing with a strategic vulnerability by depending on multinational supply chains to produce manufactured goods. Absent sufficient redundancies and physical reserves of resources, “just-in-time” lean supply systems can’t cope with sudden disruptions…”…
How many aircraft carriers does “gold-backed SDRs” have?
They´d have 21st. century state-of-the-art weaponry, not obsolete aircraft carriers now rampant with coronavirus-infected crews…
“Treasuries are the most liquid global asset and they do pay an interest rate, so treasuries it is.”
…
THE last domino
They can dump Treasuries for oil. But then the Saudis will have to put all those dollars into …. Treasuries.
But don’t worry the end of the dollar as the international reserve currency is nearing.
Okidoki,
I have been hearing that for years….I don’t deny that eventually will happen, but not yet….Which currency will become the substitute… The Renminbi? Please…
No, I am not saying it will be the Renminbi. Unless of course, they back it with gold.
Best is to not have any country’s currency be the reserve currency. That will impose fiscal discipline on those countries.
Guys, how about 50% gold-backed SDRs ?
The conversation would go something like this:
China, “We’re damned tired of taking funny money Treasuries for trade payment.”
US, “Sorry, It’s all we’ve got since Nixon closed the Gold window in 1971.”
Meeting adjourned.
It’s at least a refreshing change not having to argue about the mythical “sidelined cash” or “net-zero-loss” sector rotation myths.
I thought Jim Bianco covered the reason China may be selling treasuries well in the video Mish posted recently. If you didn’t watch the video, China needs dollars in order to buy the resources needed to restart its economy and therefore needs to sell treasury holdings. China’s capital controls, and other political issues, prevent it from being able to do swaps with the Fed like other countries and the EU. The point is not the rush to unload treasuries, but China needing dollars.
The point is not the rush to unload treasuries, but China needing dollars.
Yes, that too – Not a “dump” of treasuries or an attempt to get out of them.
Getting out of treasuries is like saying you want to get out of cash. LOL. Sure you can sell some treasuries to shore up other assets but at the end of the day the only global currency is the dollar because most commodities are traded in dollars, including oil. China got to pick the leader of the World Health Organization and look how that’s worked out for the world. Anyone want to risk them influencing the next IMF or World Bank head ? While the US gets blamed for anything and everything these days, the biggest culprit of trying to destabilize organizations that were once pillars of global safety is China. They are currently sacrificing the lives of their own citizens to help countries that are ripe for economic and geopolitical takeovers. All with the help of holding not selling US treasuries.
REPLY TO MISH:
Why can’t the trade creditor countries just sell the dollars they accumulate. They don’t have to buy dollar assets at all do they? In which case they could sell treasuries and Dollars if they wanted to? Maybe there’s more to it I don’t understand?
Who do they sell the Treasuries to?
It is 100% given that someone must have to hold every Treasury, every dollar, every stock and every bond and evrry yen and every Euro, 100% of the time.
So who does China sell treasuries to? What do they buy with them?
Ah I see thanks very much. So the creditor country can sell them, it just means someone else has Dollars to spend. If they did start selling, to market makers, it might depress the prices until a willing buyer steps in?
“Why can’t the trade creditor countries just sell the dollars they accumulate.”
…
In general mercantile economies want their currency weaker (relative) to their trading partner(s) to promote exports. Selling $US would weaken that purpose (if US a trading partner). Buying $US denominated assets props $US, helping their exports.
Yes, thanks I agree, but only whilst everyone has confidence in the currency (dollar). Perhaps today is not the day but the constant debt (money) creation with no means of repaying it will eat away at that confidence.
“Perhaps today is not the day but the constant debt (money) creation with no means of repaying it will eat away at that confidence.”
…
Possibly. Someday.
Many (wrongly) look at the size of the treasury market as a big liability and steer clear. In fact the size of the treasury market is its biggest ASSET. Many funds are in the hundreds of $billions in size … and I think a few sovereign funds are over a $trillion. As a fund manager you need markets (or at least ONE) where you place / withdraw tens (hundreds) of $billions without creating a ripple. If you put funds into a smallish market, you own it. Withdrawing funds will crash it.
One reason why Warren Buffet is so full of BS. Berkshire Hathaway is so big he has sizable stake in whatever company invested. Getting out of a company’s stock would likely tank it before complete exit. Therefore, Buffet resorts now to perma bull pimping to protect stake … until the time comes for him be world’s biggest bailout Queen (just like last recession).
Ah too big to fail. I’ve heard that before.
On that basis they can do whatever they like forever. No one need ever work, just keep issuing Treasuries and hand it out. Everyone will keep buying them because they need the volume and liquidity. That doesn’t make sense to me, at some point before the “no one need to work stage” something will give, and the pack of cards collapses.
“Ah too big to fail.”
…
No. The depth of the market = liquidity = desirability.
You need to put your fund manager hat on for a moment.
If you had to put $75 billion somewhere – at a moment’s notice – and need to pull it out – likely at a moment’s notice – without worry about wrecking market’s valuation, where would you put it? You can choose anywhere on planet earth.
The world NEEDS the US Treasury market.
That’s two of the criteria, the most important one is that the issuer doesn’t default.
“the most important one is that the issuer doesn’t default.”
…
Never happen.
Issuer can always roll / issue debt as long as there is a buyer of last resort (Federal Reserve). One of the benefits of a reserve currency is issuing debt in own currency. Its central bank can literally buy up entire issuance (see Bank of Japan). Emerging markets often have to issue debt in another currency ($US very popular). They are in for a world of hurt. One reason $US is strong now. Countries scrambling for $US to service debt.
Now, that “could” lead to a run on the $US, but another problem for another day.
The USD won’t always be the reserve currency, it’s already on the decline.