In Killing the Host, economist Michael Hudson how finance, insurance, and real estate (the FIRE sector) have seized control of the global economy at the expense of industrial capitalism and governments. The FIRE sector is responsible for today¹s extreme economic polarization (the 1% vs. the 99%) via favored tax status that inflates real estate prices while deflating the “real” economy of labor and production. Hudson shows in vivid detail how the Great 2008 Bailout saved the banks but not the economy, and plunged the U.S., Irish, Latvian and Greek economies into debt deflation and austerity. Killing the Host describes how the phenomenon of debt deflation imposes punishing austerity on the U.S. and European economies, siphoning wealth and income upward to the financial sector while impoverishing the middle class.
Thanks Beene for the info. and the excellent view of who and why things really are in the world today. I also would like to add that Paul Craig Roberts.com and Global Research.com has been blogging about this predatory-perverted kapitalism being used as a weapon to over take governments and companies for a long time now. Now that China is starting to dump all its US Treasuries we are at financial war with them and with the clear unchecked immoral integrity and greed of financial tyranny. When we let Amerika become only business and not a country we all loose…There is no such thing as a “free market-trade” because when truth is only a matter of opinion, the advantage goes to the liars.
“Now that China is starting to dump all its US Treasuries ”
And then why this would be some financial war on America? Because while Chinese Treasury holdings are substantial, they have been flat for some years now and they have not been a significant backstop for that market. Which doesn’t need much backstopping anyway as U.S. Treasuries are in a perfect yield/price place to serve as their traditional ‘flight to safety’ role. It is not like the Treasury is begging people to buy 10 years by offering double digit coupons, from what I see the yield curve is flatter than flat.
But all that aside I just haven’t seen news about China dumping Treasuries in the short run to start with. Not saying it couldn’t be happening, after all one of the points of holding U.S. Treasuries is that they are a good way to raise liquid cash and if the Chinese need a spare trillion U.S. dollars to prop up their markets that might be the exact component of their reserves that they decide to tap.
Still it would be nice to start with some actual data points actually showing the “dump”.
“The PBOC and the U.S. Embassy in Beijing didn’t immediately respond to requests for comment. Bill Gross, who manages the $1.47 billion Janus Global Unconstrained Bond Fund, tweeted Wednesday “China selling long Treasuries ????”.
Two-year Treasuries erased an earlier advance, with their yield little changed at 0.67 percent as of 11 a.m. in London. It fell as much as two basis points. The 10-year yield declined three basis points to 2.15 percent, near to its average for the past month.
Chinese sales of U.S. government debt may have kept yields from falling this month as a selloff in global stocks prompted investors to favor the safest assets.
“By selling Treasuries to defend the renminbi, they’re preventing Treasury yields from going lower despite the fact that we’ve seen a sharp drop in the stock market,” ”
So as I suggested the Chinese seem to be selling right into ‘flight to safety’ leaving the U.S. harmfree at least on the narrow grounds of Treasury debt (the exchange rate effects being a different story).
“The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt, according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.”
“Strategically, it probably has been China’s intention to find the right time to lighten up its excessive accumulation of U.S. Treasuries,” he said.”
And the last point is important. There was a period when China was, or at least was perceived to be, the lender of last resort to the U.S. and there was huge fear that they would STOP BUYING. While the possibility of them actually SELLING threatened to drive Treasury rates to unsustainable levels. But as things stand the first two rounds of Fed QE sucked up 70% of most issues of the long bond leaving the market relatively starved. Which would seem to make this a good time for the U.S. to see one of its largest strategic rivals willingly deleveraging its holds of U.S. Treasury debt.
In the spirit of an Open Thread and not even changing the subject much, CBO reported this week that the budget deficit was projected to drop to $426 billion this year. http://www.reuters.com/article/2015/08/25/us-usa-budget-cbo-idUSKCN0QU1QJ20150825
Much of the reporting on this immediately jumped to increasing deficits in the out years to kind of pooh-pooh the current year numbers but in our immediate context the fact that Treasury is not particularly constrained by excessive borrowing needs SHORT TERM (meaning this quarter and the next couple) is important when considering the impact of a Chinese Central Bank and other Chinese actor ‘dump’ of Treasuries. I mean I few years back when Treasury was forced to find markets for $1.3-1-5 trillion in new Treasuries they probably wouldn’t have welcomed willing sellers of existing long bonds. But from the Bloomberg article we are talking total asset sales of maybe $40 billion a month of which only a portion would likely be U.S. Treasuries.
Sorry Bruce I was caught up all day with family matters…My reference to the dumping of UST came from a Leo Gerard story about China protecting its workers at todays ProsperousAmerica.org. They go on to warn about the stunning $9.3 T issuance of corporate bonds since 2009 as the major reason for lack of capital investing. They also mention that it is not good for indebted corp. balance sheets the illiquid junk bonds being traded as ETF’s to the stability of capital markets…I also saw at Zero Hedge, “Dumping UST by China”Tyler Durden and Gerald Celente.com think that the dumping could choke off the housing market and force in QE4. See todays Daily News.com
Thanks William though actual full links would be more helpful.
I’ll check out Zero Hedge but ZH itself raises a red flag for me. A fatal combination of faith in right wing economics plus hysteria seems to pervade the joint. But maybe they decided to use numbers this go around.
Parts of it are a little over my paygrade but my inclination is to call bullshit. A lot of apples and oranges mixing and projections of impacts of future selling based entirely on formula that don’t seem to apply retroactively.
The apples and oranges seems to be some confusion between “reserves” and “U.S. Treasuries held as reserves” with numbers sliding from one to the other. The basic equation is that for every $500 billion in U.S. Treasuries sold there should be a (suspiciously) precise impact on 10 year yields of 108 bps. Yet Durden has been warning that China has been selling for some time now and here leads off with these two statements back to back:
“Back in July for instance, we noted that China had dumped a record $143 billion in US Treasurys in three months via Belgium, leaving Goldman speechless for once.
We followed all of this up this week by noting that thanks to the new FX regime (which, in theory anyway, should have required less intervention), China has likely sold somewhere on the order of $100 billion in US Treasurys in the past two weeks alone in open FX ops to steady the yuan. Put simply, as part of China’s devaluation and subsequent attempts to contain said devaluation, China has been purging an epic amount of Treasurys. ”
So if China sold $143 billion in July and another $100 billion in the last two weeks we should have already seen some impact of around 54 bps on the 10 year. Moroever this would imply that China has just this year already dumped around 25% of its holdings in Treasuries without noticeable impacts on the 10 year or anything else.
As said Tyler Durden has been predicting this for years now, in fact my Googling first led me to an almost identical article from 2012. And really I am having a hard time seeing how he justifies the hysterical tinge in this while ignoring its internal contradictions:
“The clear takeaway is that there’s a substantial amount of upward pressure building for UST yields and that is a decisively undesirable situation for the Fed to find itself in going into September. On Wednesday we summed the situation up as follows: “one of the catalysts for the EM outflows is the looming Fed hike which, when taken together with the above, means that if the FOMC raises rates, they will almost surely accelerate the pressure on EM, triggering further FX reserve drawdowns (i.e. UST dumping), resulting in substantial upward pressure on yields and prompting an immediate policy reversal and perhaps even QE4.”
Well now that China’s UST liquidation frenzy has reached a pace where it could no longer be swept under the rug and/or played down as inconsequential, and now that Bill Dudley has officially opened the door for “additional quantitative easing”, it would appear that the only way to prevent China and EM UST liquidation from, as Citi puts it, “choking off the US housing market,” and exerting a kind of forced tightening via the UST transmission channel, will be for the FOMC to usher in QE4.”
I mean “frenzy”? Having a brain storm Tyler? Because this just assumes that the COMBINATION of continued ‘dumping’ of Treasuries by the Chinese AND a September rate hike will put such upward pressures on yields that the only answer is a rapid reversal of policy via a QE4. Which leads me to ask whether you could avoid ‘reversal’ by postponing ‘policy’. That is if between now and the September meeting it really looks like China is going to liquidate its Treasuries driving price down and yields up that the answer is for the Fed’s SOMA to just postpone action until the pig of Treasuries flows through the python. With or without the Fed stepping in as buyer in a QE4. After all in my feeble understanding one reason the mix of purchases between QE2 and QE3 happened was because the supply of Long Treasuries had essentially dried up, forcing SOMA to buy Agency MBS’s instead.
I don’t know. Maybe smarter people can make more sense of this but it all just seems like typical ZH to me. One step up from Goldbuggery.
And getting back to a basic point. It seems that we are in the middle of a worldwide equity meltdown that is resulting in a bog standard ‘flight to safety’ in the form of U.S. Treasuries. How a flow of funds TO Treasuries somehow suggests a danger of all Emerging Markets DUMPING Treasuries doesn’t make sense at any level. Frantic buyers don’t create gluts, they instead create shortages.
How many times has China dumped $100 billion out of their $trillion? At some point the account goes dry. Instead it seems that China manages its holdings of Treasuries in accordance with its own perceived interests. And I don’t think it is in those interests to simply liquidate Treasuries in a world where so many commodities are priced in dollars.
Yeah, I want to read articles by an unidentified someone who has been wrong for as long as they have been writing.
Hey, if I had listened to them I would have managed to avoid the problem of paying capital gains taxes since 2009. So I guess they got that going for them.
Beene I already have a reading and viewing list. If you care to make an argument BACKED by links then I will be happy to read and respond. But blind links are not an argument in themselves. I mean that and a picture is what those ‘Sponsored post: One Weird Trick’ deals consist of. Which is not a bad descriptor for half the content at places like ZH and Goldline.
EMichael even a broke clock is right twice a day. So we can clearly see that the US and China are connected at the hip but it has been them who has been raping us. Not the other way around. For us to stand by and do more of the same nothing is the reason why the pompous Trump has gained so much popularity. Since China has no real free markets, neither shall we seems to be the order of the day all the while the rich are getting ever richer. Policy debates are really about ideology and power-money… “The fool thinks he is wise, the wise man knows himself to be a fool”. Shakespeare…” Patriotism is supporting your country all the time and your government when it deserves it”. Samual Clements.
I just downloaded Hudson’s book on my Kindle. Maybe by the time I finish it I will be able to understand what you all are talking about. Probably not.
Just remember that the parasite is eating an already dying host: a deunionized America. Same isn’t happening in anything like same degree in properly unionized economies — especially those with centralized bargaining. High union density means healthy both economic and political systems.
Simple first step: make union busting a felony (bonus: invokes federal and state RICO). The only market in which you can muscle aside the other fellow’s ability to bargain with you is the labor market — the only market that the country’s overall health totally depends on. When, say, California gets it, Oregon will want it — how come they are free to unionize and we are not? Spread like grass fire (a light thing really). Once the people have their societal muscles rebuilt everything else will fall into place — the people (union lobbyists and campaign finance and 99% of the votes) will take care of the other problems by themselves. David Cay Johnston will no longer be wasting his life — a voice crying in the democratic wilderness.
Webb – Deutche Bank coined the phrase QT last week. QT = Quantitative Tightening. When the Fed buys treasury bonds it is QE, when China sells treasuries it is QT.
The $100b China sold in the past few weeks is not that big a deal. The market is enormous. The demand for safe paper during those weeks more than offset the Chinese supply.
Unless it continues – and that is the million $ question. If China is faced with more capital outflow, then more sales can be expected. The die is cast.
It is not just a question of what is happening in China. Saudi Arabia is running a 20% budget deficit due to the low price of oil. All of the Arab oil producers are dipping into the till. They are selling their reserves. So is Vietnam, Indonesia, Brazil, Mexico, Turkey.
Recall that QE 3 was $85B /month of purchases. China blew away 1+ months of QE in a week.
An article re QT. Google QT to understand what this is about:
A final point. Yes there was a move into treasury paper from those seeking safety the past few weeks. But you have to look at the other parts of the debt market. CCC yields closed at the highest since 2012 last week (13.5%).
I understand that you don’t care much about the junk market, but the problems on the bottom end of the credit spectrum have a nasty way of moving up the ladder. (think 2008) If we see a widening of spreads in the investment grade market there will be hell to pay. Don’t focus your attention on just Treasury paper to get a sense of what QT is doing to global markets.
Assuming that every penny of the reported $100 billion in reserves sold over the last two weeks were USTs we are talking $50 bn a week which is NOT “1+ month of QE in a week” but that amount in two weeks. Which is from one perspective just a typo or from another a 100% error.
If it is true that all those sales are USTs and that this is coming off $143 bn in earlier sales we are talking a short term issue: because at $50 billion a week the Chinese only have a three month sales supply.
But it is not clear that all these reserve sales are USTs which represent something like a third of Chinese reserves. And the same for the other actors, are they really dumping USTs specifically. And given the demand argument you make in para 2 why should I care.?
Your apparent answer is that I should care because of risk of contagion. But this is incoherent. If people are dumping CCC for UST or junk for safety or A for B then UST-safety-B gets stronger. Only if the whole economy breaks down would the healthy (in this case the U.S. Treasury catch the global pandemic).
In the meanwhile the Chinese no perhaps other actors are selling into a market that is only demanding 2% nominal or almost 0 real rates. In the process ever smaller portions of U.S. Long term debt is in the hands of State actors or their Central Banks who are or could be hostile to outr interests. I should cry because the Chineseare losing whatever whip had they had via holdings of USTs?
Speaking of math errors that Bloomberg article is full of them. The chart he references doesn’t support his numbers. It shows Fed balance sheet at $4.4 tn and almost a trillion below that but claims that Chinese accumulations were “almost $4 trillion” and “more than all QE” but seems to be a few hundred billions off on both. Also there is an implication that China started with a near zero balance in 2003. When the chart doesn’t support that either.
Once again citations to articles in the Business Press and in WiKi are not either economic or financial arguments. Not to mention that Bloomberg, IBD, ZeroHedge, the WSJ all have a pro-business audience and bias that all too often bleeds over from their editorial pages to their ostensibly straight reporting. That is “Business Press makes the Business Case for X” is no surprise to anyone.
Webb – “Reserves” is a defined term in CB lingo. It is defined as a CB’s holdings of foreign currency debt instruments issued by a country that has Reserve Status. This means that Reserves are in $/ Sterling/Yen, Euro, Aussie and Canadian $. All of the Reserves that China has are debt instruments issued by the governments. China has many other assets, including deposits and debt instruments of other countries, but they do not count under the accepted definition of “Reserves”.
So take that to mean that when China sells $ reserves it means it sold Treasury securities. Don’t agree? Then go back to Bloomberg or just Google “China sells US Treasuries” and search for the past week.
On that chart that you say is wrong. Read it again. It clearly says “Fed Balance Sheet” and “Chinese Reserves”. In this case Reserves means all of the reserve holdings of China. This includes those Reserves assets of the other Reserve Currency countries. (the list of countries above) So the $ equivalent of ALL of China’s reserves IS equal to the $3.6T in the chart.
And yes, Chinese official reserves were about $300B in 2003. And the current Fed balance sheet is 4.48T.
“Starting in 2003, China engaged in an unprecedented reserve-accumulation exercise buying almost 4trio of foreign assets, or more than all of the Fed’s QE program’s combined (chart 1).”
A look at the chart shows Chinese reserves starting at around $300 billion, peaking at just under $4 trillion and at charts end sitting at $3.651 tn.
I suppose we can concede that a peak accumulation of $3.6 or so over the starting point is “almost 4trio”, thought that seems awfully cavalier about $400 billion, but I am not sure it amounts to “correct in all respects”.
That same chart shows Fed Holdings starting around $600 billion and growing to an ultimate $4.487 trillion. Now just eyeballing it the nearly $3.7 trillion ACTUAL accumulation by the Fed is just a little bit more than the $3.6 trillion ACTUAL accumulation by the Chinese but if you instead allow the latter to claim “almost 4trio” it is indeed bigger. But that seems to be slicing the baloney kind of thick. Because what the unwary reader of the first quote would gather is that Chinese reserves ripe for “dumping” are current greater than total Fed Reserves rather than more than $800 billion smaller. I’ll let others determine whether that the language in the quote is totally consistent with the chart.
On this second point I have my doubts. You claim that
““Reserves” is a defined term in CB lingo. It is defined as a CB’s holdings of foreign currency debt instruments issued by a country that has Reserve Status. This means that Reserves are in $/ Sterling/Yen, Euro, Aussie and Canadian $. All of the Reserves that China has are debt instruments issued by the governments.”
Since Chinese holdings of U.S. Treasuries have been fairly steady at $1.2 trillion or less and their reserves topped out at almost $4 trillion this means that their holdings were in fact concentrated in NON-US government paper and were mostly non-dollar. This seemed odd to me so I consulted a very unofficial source and found this: https://en.wikipedia.org/wiki/Foreign_exchange_reserves_of_China
“The Foreign exchange reserves of China are mainly composed of US dollar in the forms of US government bonds and institutional bonds, and excludes reserves held by Hong Kong and Macau. As of July 2015, Foreign exchange reserves of China stood at US$ 3.65 trillion.[1][2] The reserve were $3.3 trillion by the end of 2012,[3] making it the highest foreign exchange reserve in the world. The reserve is governed by State Administration of Foreign Exchange and People’s Bank of China. An estimated two-thirds of these reserves are held in dollar-denominated assets whilst it is predicted that a quarter of the reserves are euro-denominated. In 1980, Foreign exchange reserves of China was just US$ 2.55 billion, less than half of Foreign exchange reserves of India at that time.[4]”
Now how did those “institutional bonds” slip in there and so restore the U.S. dollar share back up to 2/3rds? And what are they? Well if we follow the article we find that the difference is mostly “agency bonds” which is to say Freddie and Fannie. Which I hardly think meet the exact definition of your ” foreign currency debt instruments issued by a country that has Reserve Status”. YMMV. But what it does it put ‘Paid’ to the nonsense claim that sales of Chinese reserves of dollars are only and exclusively in the form of Treasuries. That is the answer to the question in the following is ‘Hmm, no that doesn’t follow at all’.
“So take that to mean that when China sells $ reserves it means it sold Treasury securities. Don’t agree? “
Matthew Klein notes that Very Serious People are now worried that China’s troubles, which have caused it to switch rather suddenly from a buyer of Treasuries to a seller, will cause U.S. interest rates to spike. He rightly finds this unconvincing. What he doesn’t note is we’re looking at another instance of an economic zombie in action.
For the new concern about China is, in economic terms, the same as the old concern – that the Chinese could destroy our economy by cutting off funding, either for political reasons or out of disgust over our budget deficits. This always reflected a fundamental failure to understand the economic logic, as was pointed out many times not just by yours truly * (and much earlier here ** ) but also by people like Dan Drezner. *** But scare stories about our supposed financial dependence on China just keep shambling along, propounded by people who don’t even realize that there are other views, let alone that they’re talking nonsense.”
And my favorite(check the date)
“Dean Baker gets upset by this line in today’s very useful Keith Bradsher article:
China is the biggest buyer of Treasury bonds at a time when the United States has record budget deficits and needs China to keep buying those bonds to finance American debt.
As I said, this was a very good article about China; the debt line was probably inserted because it’s considered obligatory to say this in any article about US-China relations. As it happens, however, while it’s part of what everyone knows, it’s also completely false. …
The bottom line in all this is that we don’t need the Chinese to keep interest rates down. If they decide to pull back, what they’re basically doing is selling dollars and buying other currencies — and that’s actually an expansionary policy for the United States, just as selling shekels and buying other currencies was an expansionary policy for Israel (it doesn’t matter who does it!).
As Dean nicely puts it, “China has an unloaded water pistol pointed at our heads.” Actually, it’s even better: China can, if it chooses, throw some cold water on us — but it’s a hot day, and we would actually enjoy it.
Webb – You need to look deeper and do some research. Chinese reserve numbers (like many other China stats) have to be looked at under a microscope.
The Chinese reserves that were sold are not included in the official reserves that is reported in the Fed TIC data. This is because China has placed a significant $ amount in Belgium the past few years.
A link to the TIC data follows. Go first to 2011 and look up Belgium – $30B. Then go to January 2015 and look at Belgium – up 10 fold to $350B. Now go to June and you see $100B run down to 250B. That is China. When the TIC data for August comes out we will see another reduction.
Now look at each page of the TIC report. On the bottom left is the description of the report. The numbers are exclusively Treasury Bills Bonds and Notes. No Agency paper in these numbers.
So I say again, China sold US Treasury securities. They did this on a Wednesday/Thursday and then in the next week on Monday/Tuesday. So yes, that is two weeks on a calendar. I (and the market) look at it as 5 trading days.
I understand that you will come back with more stuff no matter what I say. You do your own research and draw your own conclusions. If you want to continue to believe that China has not sold any treasuries, be my guest.
Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy
Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy
In Killing the Host, economist Michael Hudson how finance, insurance, and real estate (the FIRE sector) have seized control of the global economy at the expense of industrial capitalism and governments. The FIRE sector is responsible for today¹s extreme economic polarization (the 1% vs. the 99%) via favored tax status that inflates real estate prices while deflating the “real” economy of labor and production. Hudson shows in vivid detail how the Great 2008 Bailout saved the banks but not the economy, and plunged the U.S., Irish, Latvian and Greek economies into debt deflation and austerity. Killing the Host describes how the phenomenon of debt deflation imposes punishing austerity on the U.S. and European economies, siphoning wealth and income upward to the financial sector while impoverishing the middle class.
Thanks Beene for the info. and the excellent view of who and why things really are in the world today. I also would like to add that Paul Craig Roberts.com and Global Research.com has been blogging about this predatory-perverted kapitalism being used as a weapon to over take governments and companies for a long time now. Now that China is starting to dump all its US Treasuries we are at financial war with them and with the clear unchecked immoral integrity and greed of financial tyranny. When we let Amerika become only business and not a country we all loose…There is no such thing as a “free market-trade” because when truth is only a matter of opinion, the advantage goes to the liars.
William, enjoyed both sites, one of the better descriptions of what our government is doing is below.
Paul Craig Roberts US is Completely Busted, Non Delivery of Gold Crash the System, War in Ukraine
https://www.youtube.com/watch?v=Mc36BkW_OZU
That youtube lost me at ” . . . you were the father of Reaganomics . . . “
War in the Ukraine lol. Who cares.
China can sell all the treasuries it wants. It will just be sucked up domestically. Amazing people can’t figure that out.
William got some cite for the following?
“Now that China is starting to dump all its US Treasuries ”
And then why this would be some financial war on America? Because while Chinese Treasury holdings are substantial, they have been flat for some years now and they have not been a significant backstop for that market. Which doesn’t need much backstopping anyway as U.S. Treasuries are in a perfect yield/price place to serve as their traditional ‘flight to safety’ role. It is not like the Treasury is begging people to buy 10 years by offering double digit coupons, from what I see the yield curve is flatter than flat.
But all that aside I just haven’t seen news about China dumping Treasuries in the short run to start with. Not saying it couldn’t be happening, after all one of the points of holding U.S. Treasuries is that they are a good way to raise liquid cash and if the Chinese need a spare trillion U.S. dollars to prop up their markets that might be the exact component of their reserves that they decide to tap.
Still it would be nice to start with some actual data points actually showing the “dump”.
Well we can start with this from Bloomberg:
http://www.bloomberg.com/news/articles/2015-08-27/china-said-to-sell-treasuries-as-dollars-needed-for-yuan-support.
“The PBOC and the U.S. Embassy in Beijing didn’t immediately respond to requests for comment. Bill Gross, who manages the $1.47 billion Janus Global Unconstrained Bond Fund, tweeted Wednesday “China selling long Treasuries ????”.
Two-year Treasuries erased an earlier advance, with their yield little changed at 0.67 percent as of 11 a.m. in London. It fell as much as two basis points. The 10-year yield declined three basis points to 2.15 percent, near to its average for the past month.
Chinese sales of U.S. government debt may have kept yields from falling this month as a selloff in global stocks prompted investors to favor the safest assets.
“By selling Treasuries to defend the renminbi, they’re preventing Treasury yields from going lower despite the fact that we’ve seen a sharp drop in the stock market,” ”
So as I suggested the Chinese seem to be selling right into ‘flight to safety’ leaving the U.S. harmfree at least on the narrow grounds of Treasury debt (the exchange rate effects being a different story).
Some extra context from that Bloomberg article.
“The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt, according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.”
“Strategically, it probably has been China’s intention to find the right time to lighten up its excessive accumulation of U.S. Treasuries,” he said.”
And the last point is important. There was a period when China was, or at least was perceived to be, the lender of last resort to the U.S. and there was huge fear that they would STOP BUYING. While the possibility of them actually SELLING threatened to drive Treasury rates to unsustainable levels. But as things stand the first two rounds of Fed QE sucked up 70% of most issues of the long bond leaving the market relatively starved. Which would seem to make this a good time for the U.S. to see one of its largest strategic rivals willingly deleveraging its holds of U.S. Treasury debt.
Or what am I missing here?
In the spirit of an Open Thread and not even changing the subject much, CBO reported this week that the budget deficit was projected to drop to $426 billion this year.
http://www.reuters.com/article/2015/08/25/us-usa-budget-cbo-idUSKCN0QU1QJ20150825
Much of the reporting on this immediately jumped to increasing deficits in the out years to kind of pooh-pooh the current year numbers but in our immediate context the fact that Treasury is not particularly constrained by excessive borrowing needs SHORT TERM (meaning this quarter and the next couple) is important when considering the impact of a Chinese Central Bank and other Chinese actor ‘dump’ of Treasuries. I mean I few years back when Treasury was forced to find markets for $1.3-1-5 trillion in new Treasuries they probably wouldn’t have welcomed willing sellers of existing long bonds. But from the Bloomberg article we are talking total asset sales of maybe $40 billion a month of which only a portion would likely be U.S. Treasuries.
So someone ‘edicate’ me here.
Sorry Bruce I was caught up all day with family matters…My reference to the dumping of UST came from a Leo Gerard story about China protecting its workers at todays ProsperousAmerica.org. They go on to warn about the stunning $9.3 T issuance of corporate bonds since 2009 as the major reason for lack of capital investing. They also mention that it is not good for indebted corp. balance sheets the illiquid junk bonds being traded as ETF’s to the stability of capital markets…I also saw at Zero Hedge, “Dumping UST by China”Tyler Durden and Gerald Celente.com think that the dumping could choke off the housing market and force in QE4. See todays Daily News.com
Thanks William though actual full links would be more helpful.
I’ll check out Zero Hedge but ZH itself raises a red flag for me. A fatal combination of faith in right wing economics plus hysteria seems to pervade the joint. But maybe they decided to use numbers this go around.
Okay here is the link from ZH (see how easy this should be?)
http://www.zerohedge.com/news/2015-08-27/its-official-china-confirms-it-has-begun-liquidating-treasuries-warns-washington
Back once I read it. People can feel free to follow their own noses.
Parts of it are a little over my paygrade but my inclination is to call bullshit. A lot of apples and oranges mixing and projections of impacts of future selling based entirely on formula that don’t seem to apply retroactively.
The apples and oranges seems to be some confusion between “reserves” and “U.S. Treasuries held as reserves” with numbers sliding from one to the other. The basic equation is that for every $500 billion in U.S. Treasuries sold there should be a (suspiciously) precise impact on 10 year yields of 108 bps. Yet Durden has been warning that China has been selling for some time now and here leads off with these two statements back to back:
“Back in July for instance, we noted that China had dumped a record $143 billion in US Treasurys in three months via Belgium, leaving Goldman speechless for once.
We followed all of this up this week by noting that thanks to the new FX regime (which, in theory anyway, should have required less intervention), China has likely sold somewhere on the order of $100 billion in US Treasurys in the past two weeks alone in open FX ops to steady the yuan. Put simply, as part of China’s devaluation and subsequent attempts to contain said devaluation, China has been purging an epic amount of Treasurys. ”
So if China sold $143 billion in July and another $100 billion in the last two weeks we should have already seen some impact of around 54 bps on the 10 year. Moroever this would imply that China has just this year already dumped around 25% of its holdings in Treasuries without noticeable impacts on the 10 year or anything else.
As said Tyler Durden has been predicting this for years now, in fact my Googling first led me to an almost identical article from 2012. And really I am having a hard time seeing how he justifies the hysterical tinge in this while ignoring its internal contradictions:
“The clear takeaway is that there’s a substantial amount of upward pressure building for UST yields and that is a decisively undesirable situation for the Fed to find itself in going into September. On Wednesday we summed the situation up as follows: “one of the catalysts for the EM outflows is the looming Fed hike which, when taken together with the above, means that if the FOMC raises rates, they will almost surely accelerate the pressure on EM, triggering further FX reserve drawdowns (i.e. UST dumping), resulting in substantial upward pressure on yields and prompting an immediate policy reversal and perhaps even QE4.”
Well now that China’s UST liquidation frenzy has reached a pace where it could no longer be swept under the rug and/or played down as inconsequential, and now that Bill Dudley has officially opened the door for “additional quantitative easing”, it would appear that the only way to prevent China and EM UST liquidation from, as Citi puts it, “choking off the US housing market,” and exerting a kind of forced tightening via the UST transmission channel, will be for the FOMC to usher in QE4.”
I mean “frenzy”? Having a brain storm Tyler? Because this just assumes that the COMBINATION of continued ‘dumping’ of Treasuries by the Chinese AND a September rate hike will put such upward pressures on yields that the only answer is a rapid reversal of policy via a QE4. Which leads me to ask whether you could avoid ‘reversal’ by postponing ‘policy’. That is if between now and the September meeting it really looks like China is going to liquidate its Treasuries driving price down and yields up that the answer is for the Fed’s SOMA to just postpone action until the pig of Treasuries flows through the python. With or without the Fed stepping in as buyer in a QE4. After all in my feeble understanding one reason the mix of purchases between QE2 and QE3 happened was because the supply of Long Treasuries had essentially dried up, forcing SOMA to buy Agency MBS’s instead.
I don’t know. Maybe smarter people can make more sense of this but it all just seems like typical ZH to me. One step up from Goldbuggery.
And getting back to a basic point. It seems that we are in the middle of a worldwide equity meltdown that is resulting in a bog standard ‘flight to safety’ in the form of U.S. Treasuries. How a flow of funds TO Treasuries somehow suggests a danger of all Emerging Markets DUMPING Treasuries doesn’t make sense at any level. Frantic buyers don’t create gluts, they instead create shortages.
Here is the 2012 article.
http://www.zerohedge.com/news/china-dumps-100-billion-usts-december-revised-tic-data-uk-now-russias-shadow-buyer
How many times has China dumped $100 billion out of their $trillion? At some point the account goes dry. Instead it seems that China manages its holdings of Treasuries in accordance with its own perceived interests. And I don’t think it is in those interests to simply liquidate Treasuries in a world where so many commodities are priced in dollars.
Bruce, few numbers, and just historical facts we learn and forget. Just like all debt is not bad, only that which fails to create value.
https://www.youtube.com/watch?v=06WOhNgXBZ
Tyler Durden.
geez
Yeah, I want to read articles by an unidentified someone who has been wrong for as long as they have been writing.
Hey, if I had listened to them I would have managed to avoid the problem of paying capital gains taxes since 2009. So I guess they got that going for them.
Beene I already have a reading and viewing list. If you care to make an argument BACKED by links then I will be happy to read and respond. But blind links are not an argument in themselves. I mean that and a picture is what those ‘Sponsored post: One Weird Trick’ deals consist of. Which is not a bad descriptor for half the content at places like ZH and Goldline.
EMichael even a broke clock is right twice a day. So we can clearly see that the US and China are connected at the hip but it has been them who has been raping us. Not the other way around. For us to stand by and do more of the same nothing is the reason why the pompous Trump has gained so much popularity. Since China has no real free markets, neither shall we seems to be the order of the day all the while the rich are getting ever richer. Policy debates are really about ideology and power-money… “The fool thinks he is wise, the wise man knows himself to be a fool”. Shakespeare…” Patriotism is supporting your country all the time and your government when it deserves it”. Samual Clements.
Clemens
And that’s all I have to say about that.
Bruce, thanks for the help and will not be lazy with making a argument with a vid instead of stated argument in the future.
Bruce,
Very glad you are back.
I just downloaded Hudson’s book on my Kindle. Maybe by the time I finish it I will be able to understand what you all are talking about. Probably not.
Just remember that the parasite is eating an already dying host: a deunionized America. Same isn’t happening in anything like same degree in properly unionized economies — especially those with centralized bargaining. High union density means healthy both economic and political systems.
Simple first step: make union busting a felony (bonus: invokes federal and state RICO). The only market in which you can muscle aside the other fellow’s ability to bargain with you is the labor market — the only market that the country’s overall health totally depends on. When, say, California gets it, Oregon will want it — how come they are free to unionize and we are not? Spread like grass fire (a light thing really). Once the people have their societal muscles rebuilt everything else will fall into place — the people (union lobbyists and campaign finance and 99% of the votes) will take care of the other problems by themselves. David Cay Johnston will no longer be wasting his life — a voice crying in the democratic wilderness.
Webb – Deutche Bank coined the phrase QT last week. QT = Quantitative Tightening. When the Fed buys treasury bonds it is QE, when China sells treasuries it is QT.
The $100b China sold in the past few weeks is not that big a deal. The market is enormous. The demand for safe paper during those weeks more than offset the Chinese supply.
Unless it continues – and that is the million $ question. If China is faced with more capital outflow, then more sales can be expected. The die is cast.
It is not just a question of what is happening in China. Saudi Arabia is running a 20% budget deficit due to the low price of oil. All of the Arab oil producers are dipping into the till. They are selling their reserves. So is Vietnam, Indonesia, Brazil, Mexico, Turkey.
Recall that QE 3 was $85B /month of purchases. China blew away 1+ months of QE in a week.
An article re QT. Google QT to understand what this is about:
http://www.bloomberg.com/news/articles/2015-08-27/deutsche-bank-it-s-chinese-quantitative-tightening-that-s-been-slamming-markets-around-the-world
A final point. Yes there was a move into treasury paper from those seeking safety the past few weeks. But you have to look at the other parts of the debt market. CCC yields closed at the highest since 2012 last week (13.5%).
I understand that you don’t care much about the junk market, but the problems on the bottom end of the credit spectrum have a nasty way of moving up the ladder. (think 2008) If we see a widening of spreads in the investment grade market there will be hell to pay. Don’t focus your attention on just Treasury paper to get a sense of what QT is doing to global markets.
Krasting numbers matter.
Assuming that every penny of the reported $100 billion in reserves sold over the last two weeks were USTs we are talking $50 bn a week which is NOT “1+ month of QE in a week” but that amount in two weeks. Which is from one perspective just a typo or from another a 100% error.
If it is true that all those sales are USTs and that this is coming off $143 bn in earlier sales we are talking a short term issue: because at $50 billion a week the Chinese only have a three month sales supply.
But it is not clear that all these reserve sales are USTs which represent something like a third of Chinese reserves. And the same for the other actors, are they really dumping USTs specifically. And given the demand argument you make in para 2 why should I care.?
Your apparent answer is that I should care because of risk of contagion. But this is incoherent. If people are dumping CCC for UST or junk for safety or A for B then UST-safety-B gets stronger. Only if the whole economy breaks down would the healthy (in this case the U.S. Treasury catch the global pandemic).
In the meanwhile the Chinese no perhaps other actors are selling into a market that is only demanding 2% nominal or almost 0 real rates. In the process ever smaller portions of U.S. Long term debt is in the hands of State actors or their Central Banks who are or could be hostile to outr interests. I should cry because the Chineseare losing whatever whip had they had via holdings of USTs?
4 month sales supply. My own math error
Speaking of math errors that Bloomberg article is full of them. The chart he references doesn’t support his numbers. It shows Fed balance sheet at $4.4 tn and almost a trillion below that but claims that Chinese accumulations were “almost $4 trillion” and “more than all QE” but seems to be a few hundred billions off on both. Also there is an implication that China started with a near zero balance in 2003. When the chart doesn’t support that either.
Once again citations to articles in the Business Press and in WiKi are not either economic or financial arguments. Not to mention that Bloomberg, IBD, ZeroHedge, the WSJ all have a pro-business audience and bias that all too often bleeds over from their editorial pages to their ostensibly straight reporting. That is “Business Press makes the Business Case for X” is no surprise to anyone.
Webb – “Reserves” is a defined term in CB lingo. It is defined as a CB’s holdings of foreign currency debt instruments issued by a country that has Reserve Status. This means that Reserves are in $/ Sterling/Yen, Euro, Aussie and Canadian $. All of the Reserves that China has are debt instruments issued by the governments. China has many other assets, including deposits and debt instruments of other countries, but they do not count under the accepted definition of “Reserves”.
So take that to mean that when China sells $ reserves it means it sold Treasury securities. Don’t agree? Then go back to Bloomberg or just Google “China sells US Treasuries” and search for the past week.
http://www.bloomberg.com/news/articles/2015-08-27/china-said-to-sell-treasuries-as-dollars-needed-for-yuan-support
On that chart that you say is wrong. Read it again. It clearly says “Fed Balance Sheet” and “Chinese Reserves”. In this case Reserves means all of the reserve holdings of China. This includes those Reserves assets of the other Reserve Currency countries. (the list of countries above) So the $ equivalent of ALL of China’s reserves IS equal to the $3.6T in the chart.
And yes, Chinese official reserves were about $300B in 2003. And the current Fed balance sheet is 4.48T.
So the chart is correct in all respects.
Fed Quarterly Report:
http://www.federalreserve.gov/monetarypolicy/files/quarterly_balance_sheet_developments_report_201508.pdf
Chart from FT on Chinese Reserves:
http://blogs.ft.com/andrew-smithers/2014/04/chinas-problems-are-home-made/
Okay lets take this slow. The article says:
A look at the chart shows Chinese reserves starting at around $300 billion, peaking at just under $4 trillion and at charts end sitting at $3.651 tn.
I suppose we can concede that a peak accumulation of $3.6 or so over the starting point is “almost 4trio”, thought that seems awfully cavalier about $400 billion, but I am not sure it amounts to “correct in all respects”.
That same chart shows Fed Holdings starting around $600 billion and growing to an ultimate $4.487 trillion. Now just eyeballing it the nearly $3.7 trillion ACTUAL accumulation by the Fed is just a little bit more than the $3.6 trillion ACTUAL accumulation by the Chinese but if you instead allow the latter to claim “almost 4trio” it is indeed bigger. But that seems to be slicing the baloney kind of thick. Because what the unwary reader of the first quote would gather is that Chinese reserves ripe for “dumping” are current greater than total Fed Reserves rather than more than $800 billion smaller. I’ll let others determine whether that the language in the quote is totally consistent with the chart.
On this second point I have my doubts. You claim that
Since Chinese holdings of U.S. Treasuries have been fairly steady at $1.2 trillion or less and their reserves topped out at almost $4 trillion this means that their holdings were in fact concentrated in NON-US government paper and were mostly non-dollar. This seemed odd to me so I consulted a very unofficial source and found this:
https://en.wikipedia.org/wiki/Foreign_exchange_reserves_of_China
Now how did those “institutional bonds” slip in there and so restore the U.S. dollar share back up to 2/3rds? And what are they? Well if we follow the article we find that the difference is mostly “agency bonds” which is to say Freddie and Fannie. Which I hardly think meet the exact definition of your ” foreign currency debt instruments issued by a country that has Reserve Status”. YMMV. But what it does it put ‘Paid’ to the nonsense claim that sales of Chinese reserves of dollars are only and exclusively in the form of Treasuries. That is the answer to the question in the following is ‘Hmm, no that doesn’t follow at all’.
geez
I hate zombies, and those who enable them.
http://krugman.blogs.nytimes.com/2015/08/31/the-china-debt-zombie/
August 31, 2015
The China Debt Zombie
By Paul Krugman
Matthew Klein notes that Very Serious People are now worried that China’s troubles, which have caused it to switch rather suddenly from a buyer of Treasuries to a seller, will cause U.S. interest rates to spike. He rightly finds this unconvincing. What he doesn’t note is we’re looking at another instance of an economic zombie in action.
For the new concern about China is, in economic terms, the same as the old concern – that the Chinese could destroy our economy by cutting off funding, either for political reasons or out of disgust over our budget deficits. This always reflected a fundamental failure to understand the economic logic, as was pointed out many times not just by yours truly * (and much earlier here ** ) but also by people like Dan Drezner. *** But scare stories about our supposed financial dependence on China just keep shambling along, propounded by people who don’t even realize that there are other views, let alone that they’re talking nonsense.”
And my favorite(check the date)
“Dean Baker gets upset by this line in today’s very useful Keith Bradsher article:
China is the biggest buyer of Treasury bonds at a time when the United States has record budget deficits and needs China to keep buying those bonds to finance American debt.
As I said, this was a very good article about China; the debt line was probably inserted because it’s considered obligatory to say this in any article about US-China relations. As it happens, however, while it’s part of what everyone knows, it’s also completely false. …
The bottom line in all this is that we don’t need the Chinese to keep interest rates down. If they decide to pull back, what they’re basically doing is selling dollars and buying other currencies — and that’s actually an expansionary policy for the United States, just as selling shekels and buying other currencies was an expansionary policy for Israel (it doesn’t matter who does it!).
As Dean nicely puts it, “China has an unloaded water pistol pointed at our heads.” Actually, it’s even better: China can, if it chooses, throw some cold water on us — but it’s a hot day, and we would actually enjoy it.
oops
Webb – You need to look deeper and do some research. Chinese reserve numbers (like many other China stats) have to be looked at under a microscope.
The Chinese reserves that were sold are not included in the official reserves that is reported in the Fed TIC data. This is because China has placed a significant $ amount in Belgium the past few years.
A link to the TIC data follows. Go first to 2011 and look up Belgium – $30B. Then go to January 2015 and look at Belgium – up 10 fold to $350B. Now go to June and you see $100B run down to 250B. That is China. When the TIC data for August comes out we will see another reduction.
Now look at each page of the TIC report. On the bottom left is the description of the report. The numbers are exclusively Treasury Bills Bonds and Notes. No Agency paper in these numbers.
So I say again, China sold US Treasury securities. They did this on a Wednesday/Thursday and then in the next week on Monday/Tuesday. So yes, that is two weeks on a calendar. I (and the market) look at it as 5 trading days.
I understand that you will come back with more stuff no matter what I say. You do your own research and draw your own conclusions. If you want to continue to believe that China has not sold any treasuries, be my guest.
The TIC data:
http://www.treasury.gov/ticdata/Publish/mfhhis01.txt
A discussion of the Belgian connection (there are many other sources on this – Google China, Belgium, Reserves)
http://www.bloomberg.com/news/articles/2014-07-27/china-hides-treasury-buys-in-belgium-chart-of-the-day
http://www.bloomberg.com/news/articles/2014-07-27/china-hides-treasury-buys-in-belgium-chart-of-the-day