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Sunday, August 18, 2019

China threatens financial nuke

I'll have to think through this before reaching any firm conclusions, but I'm dubious that what has been called the Chinese "nuclear option" of selling its T-bills is likely to be a very effective tactic.
If there is any further pushback from the US on any of these Chinese projects in Iran, then Beijing will invoke in full force the ‘nuclear option’ of selling all or a significant part of its US$1.4 trillion holding of US Treasury Bills, with a major chunk of the paper due to be sold in September on this basis. This massive holding of these bonds - through which the US finances its economy and is an important factor both in the value of the dollar and therefore in the health of US international companies especially – has been used as a bargaining chip before by China, especially when it feels threatened. Back in 2007, just before the great financial crisis, a number of senior Chinese figures at various state-run think tanks – through which China often signals its big geopolitical threats – stated that the large-scale selling of this massive Treasury Bill holding would trigger a dollar crash, a huge spike in bond yields, the collapse of the housing market and stock market chaos.

Such a tactic would neatly fit into China’s overall strategy to have the renminbi challenge the US dollar’s status as the key global reserve currency and the prime currency for global energy transactions. “The long-planned sequencing for this was inclusion in the SDR {Special Drawing Rights] mix, which happened in 2016, increasing use as a trading currency, which followed that, use as the key currency of an international energy trading exchange, which has occurred with the creation of the renminbi-denominated Shanghai International Energy Exchange in last year, and the calls from big oil producers and other major trading nations to use the renminbi, which has been happening over the past few years,” the head of a New York-based commodities hedge fund told OilPrice.com. Only recently, Leonid Mikhelson, chief executive officer of Russian oil major, Novatek, said that future sales to China denominated in renminbi is under consideration and that US sanctions accelerate the process of Russia trying to switch away from US dollar-centric oil and gas trading and the damage from potential sanctions that go with it. “This has been discussed for a while with Russia’s largest trading partners such as India and China, and even Arab countries are starting to think about it... If they do create difficulties for our Russian banks then all we have to do is replace dollars,” he said. “The trade war between the US and China will only accelerate the process,” he added.
At first glance, it looks to me the potential US response of simply repudiating its debt and declaring those T-bills to be of no value will be considerably more harmful to China than selling the debt will be to the USA.

Those who are focused on posturing and threats never seem to keep in mind that the enemy always gets a vote.

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106 Comments:

Blogger Nate August 18, 2019 10:30 AM  

this is a gun China can fire of it chooses.. but that gun is pointing at chinas head.

Blogger Lovekraft August 18, 2019 10:36 AM  

First the boogeyman was Russia. Now it's China's turn.

To me, Israel, Saudi Arabia, Turkey and other Middle Eastern nations are the primary source of our ills.

I imagine China and Russia look at the United States and see parallels to how their societies were brought to near-collapse because of the above-noted region.

Blogger Stg58/Animal Mother August 18, 2019 10:37 AM  

China's panda mask falls and exposes itself to everyone, not just the US. Same with the Hong Kong situation.

Blogger Nate August 18, 2019 10:41 AM  

Trump has some great accomplishments.. but exposing China for the economic paper tiger that it is has to be counted as the greatest.

Blogger Doktor Jeep August 18, 2019 10:45 AM  

T is for boomer

Blogger Stg58/Animal Mother August 18, 2019 10:51 AM  

Ripping out China's tendrils into our economy, tech, and defense sectors is well worth the arrhythmia it induces in many people.

Blogger Rick August 18, 2019 10:55 AM  

Yes, projecting your threat is like asking for permission, no? At least that’s how this one comes across to me.

Blogger Zorlig August 18, 2019 10:55 AM  

The demand for us debt is so high that rates have cratered. They don't even own more than one years worth of debt issuance. If they sold all of it, it would have no measurable impact.

Blogger Ingot9455 August 18, 2019 10:56 AM  

Like a country that just devalued its currency 20% can afford to sell all its foreign currency at the new, higher price?

At a cut-rate, fire sale?

Hell, if they put it on the market the Fed can print 700 billion dollars and buy it back at half-price! We'll have raised the deficit by 700 billion in that year but reduced our total debt by 1.4 trillion. Trump will be the first President to reduce our outstanding total debt since Nixon!

Blogger Ominous Cowherd August 18, 2019 10:56 AM  

At first glance, it looks to me the potential US response of simply repudiating its debt and declaring those T-bills to be of no value will be considerably more harmful to China than selling the debt will be to the USA.

T bills aren't anonymous bearer bonds, so it should be trivially easy to decree that any Treasury instrument formerly held by China is invalid.

This probably won't make it harder for the US to borrow, unfortunately. Sovereign defaults are common. Argentina does it every couple of decades, for example

Blogger TMLutas August 18, 2019 10:56 AM  

The proper response, if anyone in Congress had the balls to do it, is to propose that any country that does this is engaging in a financially hostile act and the pre-arranged response is to exit the debt markets as a national emergency until that bolus of quickly sold debt is absorbed. Either we run the printing presses directly or revitalize the power of the executive to stop spending money or even both.

So long as the US does not sell debt in the artificially depressed debt market, the country's fiscal situation doesn't get hurt in such a scenario. The sellers (predominantly the PRC in this case) get hurt because the cash sellers get for their bills and bonds are depressed but buyers get a bargain and the US Treasury payout doesn't change by a single measly dollar.

It's only because there is no legal way to stop the Treasury from acting like idiots and selling new bonds into a depressed market that this threat holds any danger to the US at all. The Congress can, and should, fix this.

Blogger Mr.MantraMan August 18, 2019 10:58 AM  

Chinese have Boomercons as well, "just you wait, one of these days you will push us too far", in Chinese of course.

Of course if those notes, bills and bonds pay any interest at all then they might be scooped up in milliseconds in our bountiful negative rate environment.

Blogger Pope Cleophus I August 18, 2019 11:04 AM  

Hong Kong - You mean that US sponsored color revolution? Watching Honk Kong is like watching Ukraine in 2014. The playbook NEVER changes.

Blogger The Lab Manager August 18, 2019 11:05 AM  

It's true the US is bit of a banana republic at the upper echelons of Federal Government, but I'm still waiting for what amounts to 'turd world' countries being able to work together a viable financial system among themselves that could override the dollar followed by the Euro. I'm doubtful I would see it in my remaining lifetime short of a worldwide gold or silver commodity standard of some sort, and that won't happen because us proles in all countries could actually be wealthier in purchasing power.

Blogger Salt August 18, 2019 11:08 AM  

Okay, they sell off the bonds they hold. Who are they selling to? Besides, dumping them onto the market drives the price down which soars the yield. Makes for a good buy for someone.

Blogger Anne August 18, 2019 11:13 AM  

Ingot9455 wrote:Like a country that just devalued its currency 20% can afford to sell all its foreign currency at the new, higher price?

At a cut-rate, fire sale?

Hell, if they put it on the market the Fed can print 700 billion dollars and buy it back at half-price! We'll have raised the deficit by 700 billion in that year but reduced our total debt by 1.4 trillion. Trump will be the first President to reduce our outstanding total debt since Nixon!


I like this idea. Would it actually work? Would Trump need Congress's cooperation to do it?

Blogger bodenlose Schweinerei August 18, 2019 11:18 AM  

@9 - Exactly. If China chooses to sell all those bonds, who's going to buy them? Certainly nobody's going to pay full fare for them, knowing China is desperate to sell. Despite all the posturing, China could ill afford to eat the enormous losses involved.

And as for "such a tactic would neatly fit into China’s overall strategy to have the renminbi challenge the US dollar’s status as the key global reserve currency and the prime currency for global energy transactions", why have the Chinese built up such huge dollar reserves? Because, again despite all the posturing, nobody wants the garbage currency that is the RMB and they need a currency others will actually accept to pay for all those imports. The same holds true, to a slightly lesser degree, for the ruble. This, more the daily more toothless US military "threat", is why only the most desperate, like Iran, have yet attempted to decouple from the international banking cabal.

Blogger DJ | AMDG August 18, 2019 11:20 AM  

Aren’t T-Bills a form of bond? Can someone explain the mechanism for how bond yields would RISE if bonds suddenly flooded the market? Is it a result of the price of the bond falling because supply increases subsequently increasing the payout delta at maturity? If so, how would this negatively impact the US government? Aren’t they only on the hook for the original mature value regardless it’s last sale price? Furthermore, although open market previously issued T-bills might drop in price if the available supply spikes, how does that impact the price of T-bills yet to be issued?

I feel like the complexity of the stock/bond market is purposefully designed to be incomprehensible to hide rampant corruption so that the string holders always profit and the masses always lose. House wins....

Blogger Rick August 18, 2019 11:24 AM  

Not unrelated question, how will the timing of Brexit effect our 2020 election? Will the EU collapse in time? In a good way or a bad way?

Blogger cloom August 18, 2019 11:26 AM  

0.7 trillion was sold by the Federal Reserve in the last 1.5 years and 1.4 trillion was bought in eight weeks around Oct 2008. So China's magnitude might not be enough to change sentiment for the US$ as much as those numbers could do in 2007 when such changes were not in history. It would change sentiment toward China as in: not managing its exchange rate with US reserves and I think signaling moving toward reducing trade and reducing capital movement.

Blogger Rick August 18, 2019 11:26 AM  

“China could ill afford to eat the enormous losses involved.”

I’ll show you... — I’ll commit suicide!

Blogger DJ | AMDG August 18, 2019 11:27 AM  

I also recently read that Japan actually holds the most US debt (T-bills?) than anyone. I’d be more than ok telling anyone who buys those Chinese purchased T-bills at basement prices that we simply won’t honor them and they can sit and spin, would we really do that when it would signal to the world that the US can’t be trusted to back it’s foriegn held T-bills and just quicken the pace of dumping the USD as the global reserve currency?

Blogger Rek. August 18, 2019 11:27 AM  

Speaking of. Where do you guys go for information regarding investing money? Id really love it if Vox could dedicate a darkstream on investing but he says he doesnt give investment advice. Now i realize talking about investing money in the abstract is not the same as giving advice but still you guys get my point. So if you guys have any tips other than being bullish on gold and buying farmable land id really appreciate it.

Blogger LZ August 18, 2019 11:32 AM  

This post I wrote in 2015 has a good link to an article (view-able if you're below the free limit) breaking down why it's not going to work. Back in 2013, when everyone was convinced the yuan was only going higher, I discussed how it could devale.

tl;dr
China stopped growing reserves in 2014 (stopped mass accumulation of USD/treasuries). It has faced severe depreciation pressure over this period. It has strict capital controls in place to prevent dollars from leaving.

Chinese exporters hoard US dollars in overseas bank accounts. Chinese citizens move capital out of China any chance they get.

Chinese financial system still uses dollars as the base money. They have been in a liquidity crunch because of the strong dollar. Trade war exacerbates this.

Dumping treasuries only works as a weapon if it triggers or exacerbates an existing weak dollar trend. If China dumps USDs now and USD keeps rising, game over. Think about this: if China dumps, US interest rates rise. They're already far above Japanese and European rates. Capital will be sucked out of the global economy if China unloads.
Chinese yuan turns into toilet paper because they can't stop their currency from depreciating against USD without selling foreign currencies or gold to buy back yuan, but that action also drives US dollar higher in the process.

I still believe the most likely outcome is China does a major overnight devolution of yuan at some point to protect its FX reserves. The idea that they'll dump them here is crazy. But after they devalue, they'll be in a strong position to sell out at the high.

Blogger Timmy3 August 18, 2019 11:40 AM  

China won’t be able to sell them quickly enough. They would already be useless when the dollar crashes. Then who will buy yuans? Who can trust them? They’re better off doing it gradually than act hastily.

Blogger Ominous Cowherd August 18, 2019 11:40 AM  

DJ | AMDG wrote:nd? Can someone explain the mechanism for how bond yields would RISE if bonds suddenly flooded the market?

Would you pay full price for a bond that has a 5% coupon when a newly issued bond has a 10% coupon? Or would you pay half price for the 5% coupon bond, so that it has the same yield as the newly issued one that is being offered?

Obviously bond price and bond yields are inverse. This stuff isn't complicated.

Blogger Tars Tarkas August 18, 2019 11:41 AM  

China borrowed a lot of money from the US during WW2 and never repudiated it or paid it.

I wonder if the US can use that as an excuse to just declare the bonds to be payment for debt to the US previously unpaid.

Blogger Nym Coy August 18, 2019 11:43 AM  

Could cause a housing crash? Yaaaaas. Do it! I'd like to pick up some more properties.

Blogger LZ August 18, 2019 11:48 AM  

Here's two charts updated through July showing the relationship between FX reserves and the yuan, as well as reserves versus the U.S. Dollar Index (DXY). Note that reserves dipped in July, DXY spiked, and USDCNY broke through the closely watched 7.00 level in August and global financial markets immediately tanked. The nuke everyone should be worried about is China massively devaluing.

Blogger Ominous Cowherd August 18, 2019 11:49 AM  

bodenlose Schweinerei wrote:@9 - Exactly. If China chooses to sell all those bonds, who's going to buy them? Certainly nobody's going to pay full fare for them, knowing China is desperate to sell. Despite all the posturing, China could ill afford to eat the enormous losses involved.

If China has a choice to spend one trillion on a shooting war, or take a half trillion loss in the financial markets, which loss would they rather eat? I would have guessed they'd opt to blow all their reserves on a shooting war, so this threat is a happy surprise.

Also, this tough talk about dumping treasurys might be in anticipation of sanctions caused by the upcoming massacre in Hong Kong. That might be what prompts the US to default on the bonds China holds. If they anticipate that, better to take a partial loss now than a 100% loss soon.

Blogger jmg August 18, 2019 11:50 AM  

help me here, is the usa or anybody required to buy the t-bills china holds?
do they hold an expiration like a bond, do they pay a higher yield than any others by any other nation? why care if they sell paper, usa got the cash right?

Blogger justaguy August 18, 2019 11:50 AM  

Thinking about today's situation and China-- with a large amount of $ in negative interest rate bonds, and large amounts of $ clamoring for US debt which still pays a positive interest rate, I think that China selling out their bonds would actually help the US by lowering our interest rates. Most of the world would see the sale as a political move in the trade fight, so likely would not take the sales as a sign of US financial weakness.

Realize that the central banks basically help each other and between the EU, China and the US, they just print/manufacture what funds are needed.

Blogger Ivar August 18, 2019 11:54 AM  

Regarding China selling its U.S. government instruments, I don't see why that is such a big deal. If the Chinese just dump them on the market, the new buyers will simply get a windfall, because the lower price of the instruments will simply mean that the new owner will receive a higher effective return. It may cause some temporary liquidity problems for the U.S., but I think that will correctly correct itself. If anything, China will have shot itself in the foot.

While the U.S. economy has been mismanaged for generations, I also am convinced that the Chinese economy is built on sand. I think what we are learning is that the only economy that matters is the economy of things, whereas the financial establishment focuses on the passing of paper.

Blogger Ingot9455 August 18, 2019 11:54 AM  

@23 It's a big topic and everyone's situation and capability for risk is different.

There are also laws about giving financial advice depending on where you are.

To answer your question you'd want to talk to a real financial planning advisor who can find out where you are, what are your liabilities, what's your debt, what expenditures do you have coming up, what are your income streams, do you have an emergency fund of 3-6 months of your income stream, what's your retirement planning like, what money do you have that you can rationally play with, and so on.

Given that, Vox is wise not to offer investment advice.

If you have money to spare, go research some local financial advisors and buy some of their time.
If you're at a negative level and looking to get out of some horrible debt situation, start with Dave Ramsey.

If you're at a base level and just have no knowledge, you can read some of Ric Edelman's books. That will get you to the beginner level you will want to speak intelligently with a financial planner.

Blogger LZ August 18, 2019 11:55 AM  

Also, this tough talk about dumping treasurys might be in anticipation of sanctions caused by the upcoming massacre in Hong Kong.

Yes, as with Russia, there's political risk should the US fully weaponize the currency. It's not crazy for China to think USD isn't a safe asset to hold. But this is separate from current financial/economic situation. The current treasury bull market *would* be the time for a larger holder such as China to start unloading, but it shoots itself if it dumps. They need to figure out how to do it very quietly such that it doesn't trigger a global deflationary panic into USD and USTs, and the collapse of their own currency.

Blogger doctrev August 18, 2019 11:55 AM  

Repudiating the T-bills sent to China would crash the American bond market faster than the Chinese selling the bills. Glutting the market with T-bills made at lower interest rates is basically like dumping inferior Chinese goods on the market: people will snap up the bills, but the Chinese can't make -more- money from selling them than holding onto them, particularly when Treasury is offering bills at higher interest rates. You'll just have a pile of money sitting out there, and the sheer size of it is enough to lower its aggregate value.

Besides which: the Treasury has to pay that money anyways, unless it plans to disastrously repudiate its Chinese debt. So it's priced in. The ONLY consideration is that much debt on the market might require a hike in interest rates. Which Trump already hates and probably will not permit. This is stepping on America's toes, but a brick in the face for China. They can't be this stupid.

Blogger Ivar August 18, 2019 11:56 AM  

Please substitute "quickly" for "correctly" in line 4 of my post.

Blogger wreckage August 18, 2019 12:05 PM  

So, a nation whose entire economic strategy has been based on artificially depressing their currency, threatens to depress the US currency.
Is... that about right?

Blogger Borsabil August 18, 2019 12:06 PM  

Trump has goaded the Chinese into a trade war before they were ready for one. You want to know the real reason that the Dems, the Silicon Valley spergs and the never Trumpers hate him so very, very much? It isn't because he's mean to trannies or Mexicans. Think of the mass looting by the (((oligarchs))) after the collapse of the USSR and multiply it by a thousand. There are trillions at stake.

As for China's 'threat' to unload T-bills. It's the Blazing Saddle sketch, only this time a ching chong China man pointing a gun at his own head and threatening to shoot.

Blogger Cataline Sergius August 18, 2019 12:11 PM  

This would probably have worked on Obama.

Blogger Joe Smith August 18, 2019 12:15 PM  

"Experts" seem to think this will cause global financial chaos. That makes me think maybe it wouldn't be that big a deal.

Blogger Borsabil August 18, 2019 12:17 PM  

@38 if you've had even the most passing business relations with Chinese you'll know that their number 1 priority, if they have any substantial wealth, is to get their money out of China. The entire Canadian, Australian and New Zealand economies have been propped up for years by Chinese capital flight. China is also dependent on foreign oil and food. Received wisdom is that the Chinese communist party has been depressing the value of the RMB for years, received wisdom is wrong. I for one can live without an i-phone, food and transportation not so much. If the CCP really are hell bent on going down this path, and this isn't an empty bluff, expect to see massive civil unrest on the mainland within the year.

Blogger pyrrhus August 18, 2019 12:18 PM  

Would China be selling them to 3d parties or cashing them in? Most likely both...In any case, a US default on Treasuries due to a political dispute would wreak havoc on the market, and force prices much higher due to loss of liquidity...the US has disputes with lots of nations...

Blogger Brett baker August 18, 2019 12:19 PM  

+1

Blogger James Dixon August 18, 2019 12:23 PM  

> Besides, dumping them onto the market drives the price down which soars the yield. Makes for a good buy for someone.

Correct. And while the dollar might drop for a while that only helps to improve our trade deficit. Their understanding of the processes involved is nowhere near as good as they think it is. Their "nuke" is a dud.

Blogger James Dixon August 18, 2019 12:25 PM  

For investment commentary you can do quite a bit worse then Seeking Alpha and the Bogleheads website.

Blogger DonReynolds August 18, 2019 12:26 PM  

When I went through the economics program, there was none of the extreme language or dramatic words that journalists use these days to garnish their articles to try to make them more interesting. We are constantly reminded of words like "meltdown" (my personal favorite), or "collapse", that have no economic meaning. Of course, journalists are a bit light on their economics and often looking for drama and attention.

As with anything in macro economics, the Devil is in the details. From the standpoint of the US government, it does not matter exactly who owns their T-bills, whether they are Chinese or Argentine or German or the Vatican.

What makes the Chinese worrisome is that they have in the past behaved in uneconomic ways, what economists would call irrational. They do not always act in ways that directly serve their own economic interest. The political aspect is (at times) more important to them than simply making more money. Yes, the US is guilty of that occasionally as well, so while it is unusual, it is not unthinkable. Sometimes politics can be important.

Would the Chinese act in a way that would cause the most harm they can to the US? Yes, that could be an aspect to the "trade war", but it would be costly for them, perhaps even more costly. If they do not mind taking a bath on their holdings of US debt, they could unload it. If they insisted on full value instead, they may have to accept currency that would less than useful.... except in terms of fostering China trade with that particular country. But what if they insisted on US dollars in payment for US securities?....thus drying up the US dollar accounts in some countries. Trade with the US would be more difficult and more expensive, since the value of the dollar would climb, but only temporarily and then the Chinese would be stuck with a boatload of Nigerian money, or Venezuelan money, or Turkish money.

If there is a backstory to this, I would be looking for the oil-producing country that can provide China with oil and happens to be on the US S-list in terms of relations....Iran and Venezuela come first to mind.

Mention is made of the dollar standard used by OPEC countries, but that is not totally accurate. The Middle East is a bit old fashioned. They do not trust the value of paper currency. Therefore, the gold price of oil has been steady for decades. What has fluctuated over the years is the value of the dollar to buy that gold.

Blogger xevious2030 August 18, 2019 12:27 PM  

China has not been allowed to move into a position of strength. It has been worked with to be in a place of potential benefit. But a place of influence, not power. We control the access to the US domestic market, and we control the fiat payment to external debt. However retarded the US may be right now, it holds big cards, key dominos.

Blogger Brett baker August 18, 2019 12:29 PM  

"Special Drawing Rights in 2016"....which the head of the IMF said of in 2017, "uh, we f***ed up there. The Chinese have kept lying!"

Blogger James Dixon August 18, 2019 12:32 PM  

> help me here, is the usa or anybody required to buy the t-bills china holds?


No

> do they hold an expiration like a bond,

Yes, though the details vary with the type of bond.

> pay a higher yield than any others by any other nation?

Any other? No. Most, yes.

Blogger Dave August 18, 2019 12:47 PM  

@23 find a local investment club on Meetup, etc or inquire amongst your friends or co-workers. Many clubs surprisingly are quite good; has to do with being accountable to others and the they typically vote as a group on the investment.

Blogger Stilicho August 18, 2019 12:58 PM  

Why WOULDN'T the US repudiate the debt held by China if the Chinese are going to dump it to spike rates and hurt the dollar as an act of economic warfare? Repudiation may have the same effect on rates and the dollar, but at least the US gets $1.4 trillion in return and makes an example out of China. Pour encourager Les autres.

Blogger Jeff aka Orville August 18, 2019 1:01 PM  

Conservative Tree House has an article right now about how China has stopped buying resources in favor of buying food. They simply cannot afford to do both now, so mines across Africa are closing because the Chinese have stopped purchasing their raw materials.

So it appears our Chinese friends are truly not in a position to win any kind of trade war, while Trump can continue to pick the wings off the globalist fly.

Blogger Stilicho August 18, 2019 1:05 PM  

China has dollars (in the form of treasuries) because trade surplus. They hold on to them because cream of the crap and as leverage. They don't understand which end of the lever they are on. If you owe the bank a million dollars, you have a problem. If you owe the bank $1.4 trillion, the bank has a problem.

The next biggest foreign holder of treasuries would love to see its collateral improve at the expense of its greatest enemy via repudiation of the debt that enemy holds.

Blogger Timmy3 August 18, 2019 1:07 PM  

Is there a second option to repudiation? Just say those T-Bills are frozen or suspended from the market due to dumping unless China and US comes to a mutual beneficial schedule to sell them. Then no one will buy them and US are still obligated to uphold their value. Markets don’t crash. Dollars retain their value.

Blogger Theproductofafineeduction August 18, 2019 1:19 PM  

Hong Kong’s ire towards the mainland and the champ star of their polyurethaning isn’t new so I can see this protest being organic but then again you also can’t rule out the clown agency.

Blogger pdwalker August 18, 2019 1:24 PM  

Pope Cleophus I wrote:Hong Kong - You mean that US sponsored color revolution? Watching Honk Kong is like watching Ukraine in 2014. The playbook NEVER changes.

No. The current protests in Hong Kong are almost entirely a popular, well supported grassroots event. If there are foreign actors involved, they got involved after it had already started to try to to egg things on.

Unlike the 2014 protests which were not supported by the population at large and were funded by not one, but several overseas interests.

Blogger Hari Seldon August 18, 2019 1:41 PM  

bodenlose Schweinerei wrote:And as for "such a tactic would neatly fit into China’s overall strategy to have the renminbi challenge the US dollar’s status as the key global reserve currency and the prime currency for global energy transactions", why have the Chinese built up such huge dollar reserves? Because, again despite all the posturing, nobody wants the garbage currency that is the RMB and they need a currency others will actually accept to pay for all those imports.

Agreed. Cambodia, for example, is essentially an economic colony of China, but it looks like the renminbi has barely made a dent there:

"According to NBC, last year (2017) Cambodia imported $5.2 billion in Chinese goods, while it exported $753 million to the East Asian giant. Of that trade, $135 million worth of settlements was carried out in yuan by Cambodian companies, while Chinese firms paid at least $70 million in yuan to Cambodian firms."

Blogger FrankNorman August 18, 2019 1:53 PM  

Why shouldn't the USA repudiate it's debt, someone asked?

Well, if you borrow a ton of money, and then refuse to repay it, people might not be able to make you honor your word, but they will take note that you chose not to.
And that means they won't make the mistake of lending to you again.

Whether this would be good or bad in the case of the USA depends on your point of view.

Blogger Crew August 18, 2019 1:54 PM  

Meanwhile, The White House appoints a Non-American to their top China Advisory Job.

https://www.scmp.com/news/china/diplomacy/article/3023002/white-house-appoints-uygur-american-elnigar-iltebir-top-china

Any time you put a word in from of American, like Jewish-American, Uyger-American, it means non-American.

Blogger Crew August 18, 2019 1:57 PM  

This results in a U.S., if not worldwide, recession as well as a real crisis of confidence in the macro financial markets. It also mens Trump loses 2020.

Can you spell out in detail how it results in a US recession or are you just creating a word salad?

Hint. If China stops selling shit to us we would have to restart our manufacturing industry that went to China. That is far from a recession.

Blogger Mystic On Main August 18, 2019 2:02 PM  

"This last part is not as clear as you make it out to be. Historically it is more common to retain leadership during crisis."

The underlying principle of politics in your statement also explains why incumbents have an advantage. However, in this case, if it were to occur, Trump would be given the blame 100% no matter what the circumstances. Roosevelt was re elected in 36 despite the bad times in part because he wasn't perceived as the cause.

Blogger Mystic On Main August 18, 2019 2:13 PM  

"Can you spell out in detail how it results in a US recession or are you just creating a word salad?"

Because you can't simply "repudiat[e] its debt and declaring those T-bills [China's] to be of no value will be considerably more harmful to China than selling the debt will be to the USA."

More country's than just China hold U.S. debt. The bottom would drop out of the dollar. It would be chaos. On the other hand, if China did sell, you'd see a lot of other country's and iinstitutions step up to buy...unless the U.S. declared U.S. debt was backed by nothing, which is what declaring Chinese T Bills having no value is doing. The chaos would be such a shock to the system that you'd see a near immediate panic across the board and across the globe.

In any case, China's not going to do this. They have prospered under the current economic system.

Blogger Ingot9455 August 18, 2019 2:17 PM  

If Mystic on Main says it, it must be false.

As I already stated, the US doesn't have to repudiate the bonds if China tries to dump them on the open market. All they have to do is print money and buy them all back at the lower price. Result; maybe a tiny inflation hit which is counteracted by our total debt going from 23 billion back down to 22 billion. Totally legal, doesn't require any dramatic 'repudiations' or lacks in confidence.

Blogger The Greay Man August 18, 2019 2:19 PM  

There's a live Wine Stream and no one is in it right now!

Set notifications, folks!

Blogger Stilicho August 18, 2019 2:21 PM  

Frank, Boomer-nomics really doesn't apply in this situation. China has just threatened to sink your economy and make it impossible for you to borrow anyway. Repudiation makes perfect sense. The dollar hegemony is based on being the cream of the crap as well as punishing the helots if they get uppity. All countries repudiate their debt from time to time. Lenders still trample each other to keep lending them money though.

Moreover, as you correctly acknowledge, even if the lending spigot were shut off, it wpuld not be a bad thing for America.

Nate was right in his first comment: China has a pistol pointed at its own head.

Blogger Rick August 18, 2019 2:27 PM  

“In any case, China's not going to do this. They have prospered under the current economic system.”

Concur. Which is why I say, they would have just done it without a warning, if it was the answer to their problems.

It’s kind of like the Omega 13 device in Galaxy Quest

Blogger Nikolai Collushnikov August 18, 2019 3:21 PM  

So China will sell $1.4 Trillion out of a total market of $22 Trillion? Oh dear.

Blogger Old Griz August 18, 2019 3:49 PM  

@Crew

Yes an Uygur-American is not an American. The point is that The Chinese are seriously repressing their largest Muslim minority, the Uygurs. It's a diplomatic slap in the face to the CCP. He is probably not significant save as a symbol.

Blogger Dirk Manly August 18, 2019 3:51 PM  

@63

"Hint. If China stops selling shit to us we would have to restart our manufacturing industry that went to China. That is far from a recession."

Why the 100,000 or so people on Wall Street and it's colonies in the major cities throughout the country, would be pissed, pissed, pissed!

Meanwhile MILLIONS of households throughout the country would be rejoicing, as the domestic economy AND wages pick up significantly for the first time in 3 or 4 decades.

Blogger wahr01 August 18, 2019 3:57 PM  

This comment has been removed by the author.

Blogger Dirk Manly August 18, 2019 3:58 PM  

@65

"Because you can't simply "repudiat[e] its debt and declaring those T-bills [China's] to be of no value will be considerably more harmful to China than selling the debt will be to the USA."
"

Actually, they can. ALL of those T-bills are numbered. And the US can simply void the value of T-bills with selected serial numbers, while continuing to honor all others.

Simply put, they can just say, "China is attempting to do a massive sell-off of T-bills at a severely discounted rate as yet another act in their 3 decades of economic warfare against us. Anybody buying attempting to collect on those T-bills when the maturity date comes will be told to go pound sand. If China wants to hold onto those bonds, we will pay them in full on the maturity dates.

Blogger Crew August 18, 2019 4:14 PM  

Scaramucci must be an SJW because he is sure doubling down line one:

https://www.thegatewaypundit.com/2019/08/scaramucci-goes-full-never-trump-calls-trump-a-cult-leader-and-his-supporters-cultists-video/

I, for one, and a proud Trump Cultist!

Blogger Daniel August 18, 2019 4:58 PM  

Selectively repudiating debt would be a wicked act. The case for gold has never been stronger.

Blogger Azure Amaranthine August 18, 2019 5:30 PM  

"Can you spell out in detail how it results in a US recession or are you just creating a word salad?"

Rotten salad.

"If Mystic on Main says it, it must be false."

"All countries repudiate their debt from time to time. Lenders still trample each other to keep lending them money though."

Yes. Welcome to fiat f***ery 101. It wouldn't work for the financiers if their fraudulent "loans" were repudiated and then no more loans were taken. On the other hand, no skin off 'em if loans are retaken. All they really care about is things staying in motion so they can continue to suck.

Blogger Jack Ward August 18, 2019 5:34 PM  

Whats that old saying? May have been mentioned up page. If you owe the bank 100K you've a problem. If you owe 100 million, the bank has a problem.

Blogger Azure Amaranthine August 18, 2019 5:38 PM  

"Selectively repudiating debt would be a wicked act."

Bruh, it's the equivalent of China saying "You promised to pay us back", and getting the response "In bullshit bucks. Problem?"

Blogger map August 18, 2019 6:14 PM  

DJ | AMDG wrote:Aren’t T-Bills a form of bond? Can someone explain the mechanism for how bond yields would RISE if bonds suddenly flooded the market? Is it a result of the price of the bond falling because supply increases subsequently increasing the payout delta at maturity? If so, how would this negatively impact the US government? Aren’t they only on the hook for the original mature value regardless it’s last sale price? Furthermore, although open market previously issued T-bills might drop in price if the available supply spikes, how does that impact the price of T-bills yet to be issued?

I feel like the complexity of the stock/bond market is purposefully designed to be incomprehensible to hide rampant corruption so that the string holders always profit and the masses always lose. House wins....


Yes, a Treasury security is a debt obligation. If you buy Treasury debt, then the US government has an obligation to make coupon payments and then, when the bond matures, to pay you your money.

Bond math is complicated, but straightforward, and all bonds are priced by the same method.

For example, if the prevailing market rate for 10-year Treasuries is 5%, then a $1,000 bond is said to trade at par if it has a coupon of 5%. This means this bond will pay you $50 a year for 10 years, with the US government giving you your $1,000 back in 10 years when the bond matures.

Keep in mind, because there is no risk of default from the US government, your bond payment and restitution at maturity are not affected by anything happening in the secondary market if you hold the bond to maturity.

Let’s say, however, that you don’t want to hold the bond to maturity. You’d rather sell early for whatever reason. Well, the secondary market has to have a way of pricing your existing bond compared to every other bond. This is the yield-to-maturity calculation, that calculates the value of par-value bonds, their coupons, duration against the prevailing market interest and comes up with a YTM value.

So, what is the value of a 10-year, $1,000 Treasury with a 5% coupon when the market interest rate drops to 4%? If this bond is higher than the prevailing market rate for all other bonds, then it will have the highest YTM, which means the bond will sell at a premium to the par value of $1,000, say, $1,050 or $1,100. The higher the coupon value compared to the market and the shorter the duration, the higher the premium will be above par value for the bond.

This is where you get the inverse relationship between bond values and interest rates. The secondary market is pricing existing bonds that have higher coupons at a premium over newly issued bonds at the current market rates.

(continue)

Blogger map August 18, 2019 6:15 PM  

Keep in mind that this relationship is mathematical. Bonds that charge a premium at par lose money immediately, because you pay $1,150 for a bond that gives back $1,000 at maturity. You have to make up the difference using duration and coupon payments to make up for the $150 loss before you can turn a profit. This interplay between duration, coupons and interest rates make bonds very illiquid because they are almost always correctly priced and buys/sells happen because people have to raise cash or avoid other losses elsewhere or to meet legal requirements. So, bonds have to trade at a discount to YTM or even to par to actually move.

What the Chinese are threatening to do is introduce a condition of distressed debt into the Treasury market by attempting to sell Treasuries at a discount to either YTM or par. This means that if you have a 10-year, $1,000 Treasury at 5% that matures in, say, two years, you would dump this Treasury for $800 dollars. This means that, at maturity, not only will someone else get $100 in coupon payments, but they will get $1000 back from the US government, providing a $300 profit on an $800 investment in two years.

This is an artificial arbitrage situation that accrues to someone else’s benefit at the expense of the Chinese. These bonds will keep trading until the arbitrage situation goes away and it will have no effect on the market interest rate once the arbitrage opportunity disappears.

The temporary increase in interest rates will actually have the salutary effect of un-inverting the yield curve, which means we will have a normally functioning bond market until the arbitrage goes away. Basically, the Chinese would be undoing Fed policy.

So, no, the Chinese do not have an adequate threat against the US. The US wins just by doing nothing.

Blogger Theproductofafineeduction August 18, 2019 6:18 PM  

Hats assuming that countries are worried hat he US would do the same with the US debt they hold. Depending how the scenario goes down there may be little negative reaction from other nations if the US repudiates said debt.

Blogger Ominous Cowherd August 18, 2019 6:37 PM  

@59 Frank, sovereign default happens over and over and over. The sovereign is back in the financial markets in a year or so, selling more debt. Default does NOT stop the borrowing spree.

Blogger Mystic On Main August 18, 2019 6:52 PM  

"Selectively repudiating debt would be a wicked act. The case for gold has never been stronger."

Can you imagine the sell off of T-Bills that would happen all around the world. And yes, Gold would skyrocket to astronomical levels. The idea that repudiating just the debt that China holds and thinking that it would just impact China is kind of silly in the same way that Wily E Coyote thinking he can ride a rocket and catch the road runner is silly.

Blogger R Devere August 18, 2019 7:03 PM  

The Lab Manager wrote:It's true the US is bit of a banana republic at the upper echelons of Federal Government, but I'm still waiting for what amounts to 'turd world' countries being able to work together a viable financial system among themselves that could override the dollar followed by the Euro. I'm doubtful I would see it in my remaining lifetime .

Or anybody else's lifetime!

Those "turd-world"countries can't even fix broken pumps or stop dumping sewage next to their wells, so as to provide relatively clean water to the local villages! How are they gonna follow an IKEA instruction sheet enabling them to band togther financially???

Blogger R Devere August 18, 2019 7:12 PM  

map wrote:
So, no, the Chinese do not have an adequate threat against the US. The US wins just by doing nothing.




Unlike all previous politician POTUSES, businessman Trump understands this! It's not clear the Chinese understand Trump and most importantly j his background, , based on all the stupid moves they've made thus far!

Blogger Snidely Whiplash August 18, 2019 7:17 PM  

Mystic On Main wrote:Can you imagine the sell off of T-Bills that would happen all around the world.
Can you imagine the flood of Chinese investors buying the bonds at a steep discount?

Blogger Ominous Cowherd August 18, 2019 7:34 PM  

Daniel wrote:Selectively repudiating debt would be a wicked act.

Stopping a financial attack by premptively nuking China is good, stopping the same attack by forestalling it peacefully is wicked. There are millions of little Chinks who don't know their right hand from their left, better to kill them all than to peacefully convince third parties not take part in China's attack.

Good thing God has you to keep Him straight on moral issues.

Blogger Crew August 18, 2019 7:38 PM  

Word Salad Man is still making no sense.

Blogger Ingot9455 August 18, 2019 7:50 PM  

The whole 'tank the bond market' might have been a valid threat twenty, thirty years ago.

But times are different and the markets have changed. China hadn't spent 20-30 years building ghost cities and lying about their finances then. Oh, they were always lying but the run-up hadn't gotten so bad.

Like Warren Buffett says, when the tide goes out you see who isn't wearing pants. China's been dropping its drawers for 30 years and stealing to make up for it and they want to make the tide go out?

Blogger Azimus August 18, 2019 8:08 PM  

Whats to stop the Federal Reserve from buying them all back?

Blogger Crew August 18, 2019 8:46 PM  

@89: Heh. That would be funny. The Federal Reserve making a profit on its own T-Bills.

Blogger Ominous Cowherd August 18, 2019 9:11 PM  

@90, T-bills are obligations of the US Treasury. Federal Reserve Notes are not. As always, the Fed would make some ledger entries representing some FRNs, and in return the US Treasury owes them our taxes.

Blogger doctrev August 18, 2019 9:42 PM  

Azimus wrote:Whats to stop the Federal Reserve from buying them all back?

That's genius. Hand China -less- money than merited to clean up your balance sheet, then politely tell the rest of the world "sorry sugar, the bakery's closed." People would accept negative interest rates just to invest in sweet greenbacks, before the limited demand is gone.

I can't believe President Trump would take that kind of risk, but who knows? Starting to think he's goading China into this.

Blogger Daniel August 18, 2019 10:49 PM  

@86 Ominous Cowherd

>>>Good thing God has you to keep Him straight on moral issues.

You are such a tool. You are like these rah-rah-Ronnie Reagan Republicans. Suckered by a huckster. You seem unaware that whatever damage the American state (surface, deep, Wall Street, otherwise) can do to China it does to us, the American people, 100 times over. You delight in the fact that this wicked state controls the world's reserve currency and with that control endeavors to reward its kin and impoverish the American people. Oh, but how cool that they can stick it to the Chinaman. The Chinaman is not our enemy. When Trump does the bidding of the wicked American state he becomes our enemy. I support Trump's measure to restrict imports, but I take no delight in tangling with the Chinese, but a tool like you will be suckered every time.

Blogger Dirk Manly August 18, 2019 11:38 PM  

@93

Do you honestly believe that the ChiComs and US Deep State didn't set up the destruction of the American industrial sector together in the first place?

You believe that returning the American industrial sector, or, at the very least, that portion of the industrial sector which sells goods to individuals and businesses in the USA, is somehow a BAD THING?

Dude, what kind of psycho-actie drugs are you taking? Whatever they are, I suggest you cease doing so ASAP.

Blogger Rough Carrigan August 18, 2019 11:42 PM  

Or, if Trump's big picture goal is to get rid of the Federal Reserve privately owned central bank system foisted upon the U.S. then what better patsy could there be to have buy up debt that foreign gov'ts don't want any more. The Fed buys them up and *then* Trump repudiates the debt killing the parasitic Fed in one fell swoop.

Blogger Daniel August 18, 2019 11:49 PM  

>>Do you honestly believe that the ChiComs and US Deep State didn't set up the destruction of the American industrial sector together in the first place?

You believe that returning the American industrial sector, or, at the very least, that portion of the industrial sector which sells goods to individuals and businesses in the USA, is somehow a BAD THING?<<

China's economic, emigration policy does harm to the American people only because the US state doesn't just permit so, but encourages so. This is the plan.

You don't read carefully. I support Trump's policy to restrict trade with China. I want manufacturing brought back to our shores. I'm just not buying into this bullshit that China is the latest villain. China's actions damage the American people only because powerful state actors what this to be the case. China is not the problem, the American state is.

Blogger Snidely Whiplash August 18, 2019 11:59 PM  

@DAniel
Embrace the magic of "and".
The American elites have been stripping this country of wealth for 100 years. We get that. They're als=most down to selling the bones for fertilizer. We get that.
China is also in the act, righ this ver second, of taking our capacity to create wealth, both by transferring all our manufacturing and engineering to China, but also by buying up every productive asset the can in the US. The HAn consder non-Han to be nothing more than an extractive resource, like an ore deposit, and they would gleefully and without hesitation kill every single American if they thought they could make a profit and get away with it.

Stop being a binarist.

Blogger Dirk Manly August 19, 2019 12:27 AM  

Screwing the Han would be a definite warning to other foreign nations that cooperating with our Deep State to screw the American public can blow up in their faces.

Blogger JovianStorm August 19, 2019 12:33 AM  

Crashing the dollar would be the death knell of the Chinese economy. Cheap dollars boost exports and encourage capital expansion while Chinese exports are the least attractive option to any country that bought into dollars as a reserve currency.

China would also be unable to leverage that 1.4 trillion to continue its policy of debt spending so much that it makes the USA look like a penny pinching new York jew moneylender.

GEOTUS is ready for China

Blogger Azure Amaranthine August 19, 2019 2:13 AM  

"You are such a tool. You are like these rah-rah-Ronnie Reagan Republicans. Suckered by a huckster. You seem unaware that whatever damage the American state (surface, deep, Wall Street, otherwise) can do to China it does to us, the American people, 100 times over."

He's not saying that that's what we should do. He's pointing out that you're even more retarded than that. See:

"You don't read carefully. I support Trump's policy to restrict trade with China. I want manufacturing brought back to our shores. I'm just not buying into this bullshit that China is the latest villain."

You can repudiate or buyback without villifying or trying to start a war. Obviously.

Blogger Gettimothy August 19, 2019 7:40 AM  

Rough Carrigan wrote:Or, if Trump's big picture goal is to get rid of the Federal Reserve privately owned central bank system foisted upon the U.S. then what better patsy could there be to have buy up debt that foreign gov'ts don't want any more. The Fed buys them up and *then* Trump repudiates the debt killing the parasitic Fed in one fell swoop.

Crazy! Like buying Greenland!

oh. wait...

Essentially it’s a large real estate deal. A lot of things can be done. It’s hurting Denmark very badly because they're losing almost $700 million a year carrying it," he said. "So, they carry it at great loss, and strategically for the United States, it would be nice. And, we're a big ally of Denmark and we help Denmark, and we protect Denmark.

Yah, Trump thinks and acts Big! Like an American should. Your observation is very plausible

Blogger dc.sunsets August 19, 2019 11:19 AM  

First, "we" announce we're not going to honor debts to foreign holders of debt.
Then, "we" announce we're not going to honor those debts to seniors (adding them to the experience with which veterans are already quite familiar.)

Pretty soon the only folks whose chips will be cashed at the cashier window will be those holding the most intersectional Pokeymon points.

Clown world continues apace.

In other news, the bond market didn't so much as NOTICE this daffy discussion.

Eventually everyone will get stiffed (the Chinese can get in line), but it won't be via a deliberative decision by a POTUS or any committee. Everyone will get stiffed when the music stops (pathological social trust, still at deafening volume, goes silent) and there are no chairs and no exits through which to obtain the then-current value residing in all those promises of future cash flows.

An IOU is worth only what observers believe. Today they believe anything. Someday they'll believe nothing. The speed at which that change arrives (once change begins) will be the most interesting question answered.

Blogger Ominous Cowherd August 19, 2019 1:16 PM  

dc.sunsets wrote:Eventually everyone will get stiffed (the Chinese can get in line), but it won't be via a deliberative decision by a POTUS or any committee.

Enough promises have been made that it is no longer physically possible to keep them all. Therefore, not all of those promises will be kept. Somebody's getting stiffed; the only questions are how many somebodies, and which somebodies.

Blogger Ken Prescott August 19, 2019 4:28 PM  

The revenue from those T-Bills is the only thing keeping Chinese banks solvent.

Blogger Dirk Manly August 19, 2019 7:25 PM  

With all of the empty 1-million + resident cities the Chinese banks have financed, I doubt that even those T-Bills are keeping them solvent. The only thing solvent is that the Chinese government can't admit to the level of corruption by shutting down the banks, and all of the necessary executions which would follow. Too many dirty hands within the party itself. The Chinese government would be slitting its own throat. So, the insolvent banks stay open.

Japanese banking sector has been in a similar situation for about 30 years. This is probably part of the reason why the Japanese are having a crisis with regards to their young men not even having any interest in sex with actual women, let aone dating, marriage, and having kids. The know the economy is propped up on toothpicks and could fail at any moment, and when it all falls apart, the last thing they
want is to be worrying about one or more infants & small children.

Blogger KPKinSunnyPhiladelphia August 20, 2019 1:16 PM  

Ingot9455 wrote:@23 It's a big topic and everyone's situation and capability for risk is different.

There are also laws about giving financial advice depending on where you are.

To answer your question you'd want to talk to a real financial planning advisor who can find out where you are, what are your liabilities, what's your debt, what expenditures do you have coming up, what are your income streams, do you have an emergency fund of 3-6 months of your income stream, what's your retirement planning like, what money do you have that you can rationally play with, and so on.

Given that, Vox is wise not to offer investment advice.

If you have money to spare, go research some local financial advisors and buy some of their time.

If you're at a negative level and looking to get out of some horrible debt situation, start with Dave Ramsey.

If you're at a base level and just have no knowledge, you can read some of Ric Edelman's books. That will get you to the beginner level you will want to speak intelligently with a financial planner.


Very good advice.

Key principles.

1. Save -- every month. Avoid debt.

2. Go Tax-Free -- max your 401K if you have one, set up a Keogh if you are self employed. Fund a Roth IRA as much as you can, especially if you are under 45. Will the government try to take more money in the future than they say now they will take? Maybe, but what does it hurt to save now. The future is unknown.

3. Diversify -- across asset types and time horizon. ETFs are great for that.

None of this is easy, and there is not guarantee it will work. At some point, the world economy may plunge into a depression -- or not. At some point, there may be a an actual shooting civil war in the USA -- or not (or some low simmer social conflict -- or not).

You may decide to put all your eggs in your own entrepreneurial basket -- and maybe you win, big or medium...or the whole thing comes tumbling down.

Every situation is different, every path is different.

However, above all, you need a bourgeois attitude. Work. Get married. Have a family. Don't do drugs or alcohol to excess. Lift weights and exercise. Enjoy life, but be disciplined.

It all may turn out fantastic, and it may turn out -- meh! -- but you won't be living at the YMCA when you're 70.

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