Let's Play Doom

[ymarkov]

A meme popular in many circles, both left and right, is that Chinese holdings of US Treasury debt are a problem for the USA. Expressions include "the Chinese own us and our children" and "The Chicoms can ruin us any time."

I'm not saying that it's not a problem (heck, excessive debt is always a problem), but how exactly are these specific holdings a problem? So I'd like to play a doomsday scenario or two. I'll be the Fed/Tresury, and you be the Chinese Politburo/Central Bank. You have $1 trillion in T-bonds. Make yourself a problem.

Comments

[24816.livejournal.com]

I don't know, in normal times it shouldn't be that scary
http://seekingalpha.com/article/120547-why-china-can-t-dump-u-s-treasuries
but if there is some panic, G-d forbid, then it's one more uncertain variable. Is it true that there is only 10 c coverage for every dollar and it only holds because of common reverence?

[ymarkov.livejournal.com]

That's a good article. I wouldn't worry about a panic in T-bonds.

As to 10c coverage, I'm not sure what you mean. The dollar is a fiat currency; like all the others, it has no "coverage" at all.

[24816.livejournal.com]

I was not thinking about panic in T-bonds, but rather panic of some global conflict (e.g. China taking side of North Korea, etc. etc.)
R. Gitik was citing a friend who knows a thing or two about finances and if I recall it right, dollar stands only because there are still illusions about it.

[ymarkov.livejournal.com]

Either this is incorrect, or he means something else. Look up the definition of fiat currency.

[ymarkov.livejournal.com]

BTW, China becoming hostile would be a plus to the debt situation. All the T-bonds are just electronic entries at the Treasury. We know exactly which ones China owns, and could freeze not just the payments, but even the very trading in them.

[24816.livejournal.com]

Yeah, USSR’s companies had special ways to trade funds and the rest of population also used to believe in rubl’. For awhile.

There is a speculation that Jews live more or less comfortable in their host countries for about 400 years, and a couple of years ago they celebrated 350 years of first synagogue in America. So that could be an indication that 50 years from now US will be a very different place.
http://www.youtube.com/watch?v=6-3X5hIFXYU
http://www.telegraph.co.uk/news/worldnews/europe/5994047/Muslim-Europe-the-demographic-time-bomb-transforming-our-continent.html

We can predict only things that are already happening, but the history is full of unexpected turns.
If I recall it right in 1890 Hertzel was flirting with German Kaiser to get Palestine for Jews, promising that they will use German language, architecture, and government structure. To which Kaiser replied that it’s impossible, because for that all world’s empires should fall apart. Which exactly happened in 50 years. I cannot even list all of them: Russian, German, Austro-Hungarian, British, Turkish, Japan… – all mighty empires fell apart as if precisely for creation of Israel!

Besides it is hard to predict outcome of the any war even financial.

[ariya.livejournal.com]

They (and everyone else!) could eventually just stop lending us money, and given that the US runs a structural deficit that could be bad.
But that shouldn't happen until we get a lot more in debt, hopefully...

[ymarkov.livejournal.com]

They are selling us stuff for dollars. Then, instead of buying our stuff with those dollars, they buy T-bonds instead. I doubt they'd stop selling, so what can they do?

[malenkiy-scot.livejournal.com]

Start dumping the debt -> interest rates soar -> the government / people / businesses can't borrow + inflation -> the country which worships the god of "economic growth" is brought to its knees.

That scenario, of course, won't happen (why would the Chinese do it?), but they may use that as a stick/carrot as leverage for other purposes.

But I do agree with you that "heck, excessive *foreign* debt is always a problem" - domestically things may be regulated (read: 'taxed') so as to ameliorate the excessive borrowing, not so with foreign entities, especially those that can't be really threatened by force.

[ymarkov.livejournal.com]

*** Newsflash ***
Today in Washingotn, in response to the Chinese threat to start unloading US Treasury bonds, Fed Reserve Chairman Bernanke said: "We have recently announced a second round of quantitative easing by deciding to purchase up to $900 billion of US Treasury debt. I am happy to say that the Federal Reserve stands ready to shelve this program and purchase Chinese-held T-bonds instead - it makes no difference to us and we can 'print' an unlimited amount of dollars. Let's see how Bejing likes holding non-interest-bearing currency deposits instead of bonds."

Treasury Secretary Geitner commented: "Remember that we have the serial numbers of every single T-bond held by everyone. We shall see how fast and how much debt the Chinese will dump, but if it's a lot, I'll advise the President to declare this a hostile act and instruct the Fed to buy bonds held by the Bank of China as of today, no matter who offers them, without limit but only at 50 cents on the dollar. This will ensure that no one will want to buy Chinese-held bonds in the open market, while all other US debt trades as usual. We might get to retire a lot of debt cheap."
*** Newsflash ends ***

[malenkiy-scot.livejournal.com]

This does support what I said (I did not know about this, honest - I have not been following the news lately with work, children, Coen brothers, and all :) )

However, I have a weird feeling that you are bringing it as a rebuttal. Not being able to see your body language I can't really tell.

[ymarkov.livejournal.com]

Dude, I've weirded you out! This is fake news, I wrote it myself. As I said in the original posting: "I'll be the Fed/Treasury."

And yes, it was meant as a rebuttal. Being the (sovereign) issuer, the USA has a lot of control over its debt.

[malenkiy-scot.livejournal.com]

Dude, who has weirded whom out?! :) (Sorry, someone recently did this to me and I wanted to 'retaliate', but, obviously, could not do it on the same person as she would be ready for it).

But leaving weirding out aside, your first answer applies only in the current situation, where the Fed is trying to use a very potent remedy with unforeseeable long-term effects, that already is causing inflation (see, for example, the oil prices and the Sheqel exchange rate).

As far as the second answer is concerned, China would have to play it right - without the announcements, via proxies, relatively slowly, until it's too late. There is a thin line here between being "hostile" and legitimately cashing in.

(As an aside, see this piece)

[malenkiy-scot.livejournal.com]

This also looks interesting: http://www.brookings.edu/testimony/2010/0225_us_china_debt_prasad.aspx