Memo to China: You Look Silly When You Threaten to Dump Treasuries

Not that I expect anyone in China to take notice, but it’s always a good idea to try to observe forms:

State Bureau for Letters and Calls 国家信访局
c/o Zhongnanhai Fuyou Street Branch Post Office 中南海府右街邮政支局.
China 中国

Dear Official Tasked to Handling English Language Correspondence:

Americans often quote the saying of President Theodore Roosevelt, “Speak softly but carry a big stick.” So when Americans see a party engage in what they see as excessively loud and forceful statements, they see it as bluster and a sign of weakness. That is why, for instance, after some Chinese experts were quoted in official media speculating that China could prevent Pelosi’s plane from landing and that didn’t happen, they acted as if China was bluffing (yes, I also saw the Chinese statements that China was playing a longer game and would not make a cheap shot, but the idea of harassing her plane got press attention at the expense of later messaging).

In other words, it is important to make only realistic threats. It was realistic for Chia to impede Pelosi’s flight even though China decided to take other actions.

By contrast, threatening to dump US Treasuries is silly. Publishing it only feeds the idea that China is posturing. From Global Times, which Americans see as an official English-language outlet, in US economy to pay for graduation trip by ‘god of stocks of Capitol Hill’:

With the start of major military drills around the Taiwan island, the mainland has actually started or accelerated the process of reunification, which the US cannot stop. That means China is, in effect, prepared for US intervention. One can only imagine what China will do to eliminate potential risks, including its massive holdings of US treasuries.

China is the second-largest foreign holder of US treasuries, only after Japan. China’s holdings of US treasury securities dropped to $980.8 billion in May, falling below $1 trillion for the first time in 12 years, according to data released by the US Department of the Treasury. The further deterioration of China-US relations will likely have a direct impact on China’s risk appetite for holding US treasuries, and reducing holding of US treasuries could become a precautionary option.

This was the only large scale ultimatum the Global Times story presented and it’s bizarre to see that one mentioned. China and Japan have both been reducing their holdings of US Treasuries in recent years, with no adverse impact to the US government funding or the dollar. Recent US Treasury reports show China’s holdings at $981 billion, down from a peak of $1,316 in November 2013. That current $981 billion represents only 3.2% of total US government debt.

As Chinese-economist Michael Pettis explained in 2018, China Cannot Weaponize Its U.S. Treasury Bonds. His thesis:

A number of recent articles suggest that Chinese officials may reduce their purchases of U.S. government bonds. It is very unlikely that China can do so in any meaningful way because doing so would almost certainly be costly for Beijing. And even if China took this step, it would have either no impact or a positive impact on the U.S. economy.

As we can see, China has reduced its purchases of US government bonds, as has Japan, with no impact on the US.

As Pettis explained:

….the real reason China cannot sell off its holdings of U.S. government bonds is because Chinese purchases were not made to accommodate U.S. needs. Rather, China made these purchases to accommodate a domestic demand deficiency in China: Chinese capital exports are simply the flip side of the country’s current account surplus, and without the former, they could not hold down the currency enough to permit the latter.

To see why any Chinese threat to retaliate against U.S. trade intervention would actually undermine China’s own position in the trade negotiations, consider all the ways in which Beijing can reduce its purchases of U.S. government bonds…

China can buy other U.S. assets, other developed-country assets, other developing-country assets, or domestic assets. No other option is possible.

The first two ways would change nothing for either China or the United States. The second two ways would change nothing for China but would cause the U.S. trade deficit to decline, either in ways that would reduce U.S. unemployment or in ways that would reduce U.S. debt. Finally, the fifth way would also cause the U.S. trade deficit to decline in ways that would likely either reduce U.S. unemployment or reduce U.S. debt; but this would come at the expense of causing the Chinese trade surplus to decline in ways that would either increase Chinese unemployment or increase Chinese debt.

By purchasing fewer U.S. government bonds, in other words, Beijing would leave the United States either unchanged or better off, while doing so would also leave China either unchanged or worse off. This doesn’t strike me as a policy Beijing is likely to pursue hotly, and Washington would certainly not be opposed to it.

Another financial writer explained why China’s exports to the US result in accumulating dollar (or conceivably other foreign) assets:1

Why does China want to run a trade surplus?

China remains an export-depended economy (even though it is currently trying to shift its economic model).

Therefore, it needs to run a current account (or trade) surplus. If it does not, China will face either

more unemployment, for reduced exports mean that the Chinese exporters are forced to lay off workers,

or more debt, as Beijing will encourage large fiscal transfers to the households (social security, unemployment benefits, food stamps, etc.) or the creation of new businesses to mitigate the consequences of unemployment. All this requires more money and, consequently, more debt.

This is why China purchases US Treasuries: to run trade surpluses and avoid higher debt/unemployment — not, as many think, to “help” American consumers so that they can purchase more Chinese imports.

Let’s turn to two channels Pettis mentioned and dismissed: buying developed or developing country assets. Presumably, given the size of the amounts to be deployed, that would mainly be government debt. Even with the dollar very high (as in assets of other countries ex Russia are relatively cheap), it’s hard to see how that would be attractive to China.

For instance, China might make geopolitical waves by buying Japanese government debt. The yen is trading at very low levels and the Japanese central bank has had to buy over half the debt outstanding. But the rest is also held mainly within Japan. Even if China wanted to buy Japanese debt to support Japan (as in make a point about the US failure to do much about its long-standing post financial crisis distress), it’s not clear the market is liquid enough for China to procure all that much. And Japan is very cohesive on the financial institution side. It’s not hard to think that officials would give Japanese firms guidance not to sell Japanese government to the Chinese government or suspected intermediaries. Yet, China could still try to make purchases from non-Japanese firms, but that would likely not amount to much.

Another way to reallocate assets to make a geopolitical point would be to buy Turkish government debt. Turkey is coming close to hyperinflation. China could seek to pry Turkey from the West (which is already threatening Turkey over its increasing economic and military ties to Russia) by helping its finances. But these purchases would have to be seen more as on the order of foreign aid than investment, since the value of the bonds is likely to fall further even with some Chinese purchases.

In other words, this idea of punishing the US by dumping Treasuries may be appealing to a domestic audience, which has long been unhappy about the magnitude of China’s dollar foreign exchange reserves. But no one knowledgeable in the US will lose sleep over it.

We are not alone in pointing out much more acute pressure points, where China could inflict damage on the US at not much economic cost to China. The US has outsourced so many activities to China that it is very vulnerable. We’ve echoed experts in highlighting pharmaceuticals and ascorbic acid.

If China wants to get the US to appreciate that a full-bore conflict with China would be an exercise in severe mutual economic damage, itemizing the critical US drugs that come from China might focus minds here faster than repeating an empty Treasury threat.

1 US share of China’s total exports is falling but not fast enough to change this picture dramatically,

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  1. PlutoniumKun

    Just some general points – so far (thankfully), this is still limited (economic) war – which means that nobody escalates without thinking carefully about what the likely response will be. Or at least, you hope this is the case.

    For the reasons outlined, I doubt China will go the Treasury route – however, just because there are perfectly rational reasons not to do it, does not mean that it won’t happen. The notion that China’s store of treasuries is a ‘weapon’ is not just something you see in the western media – you see it in Chinese circles too, so there is no guarantee that the key decision makers really understand the implications. As with all other countries, lots of things happen in China because of internal pressures and posturing, not because its a rational next step. As a general rule, the bigger and more powerful the country, the more likely it is to take a stupid step, simply because the potential impact of a mistake is less for a large powerful country than a weak one.

    As for pharmaceuticals and ascorbic acid – I think China would be very reluctant to take this route for two reasons. One is that while China dominates base chemicals, the US is still very dominant with a range of high end biochemicals, and a retaliation would mean a lot of middle class and wealthy Chinese suddenly finding they can’t get the treatment they were hoping for without flying to Bangkok or Seoul. The Chinese hospital system is bad enough without inducing a shortage of key drugs. Plus, they know that this is a very important tool to keep in reserve – any attempt to use it directly will trigger many other countries (most notably India and Vietnam) to fill the vacuum.

    As for ascorbic acid, as it is technically a foodstuff, this is another area China will be reluctant to thread. China is still very dependent on key grain inputs from the US, Australia and Brazil (especially for animal feed), and any disruption would trigger food inflationary pressures. This almost always leads to domestic discontent in China, so this is another key area they will try to avoid.

    IMO when it comes to retaliation China is likely to focus on more discreet ‘weak links’ such a key manufactured products, or leaning on the US’s allies. I suspect they will much prefer less high profile but more targeted interventions.

      1. John

        No administration can afford to do so … however, never underestimate the ability of this administration to score an own goal. Look at their recent and on-going actions.

      2. LY

        Wasn’t there a past US/China scuffle over soybeans and other agriculture exports to China? The Trump administration ended up providing financial support to farmers, then it faded away from the news cycle.

        I think lobsters are still being hit, with China shifting to buying mostly from Canada.

        1. Amfortas the hippie

          yes. and soon after, all the fast food chains discovered “impossible burgers” made from soybeans…and marketed it heavily.
          i do not know(being very busy at the time) but suspect, that there was a concurrent effort around “biodiesel”, made from soy.
          anything to ensure that ADM, Conagra, et alia don’t have to produce less corn and soy and canola.
          just invent things to do with the stuff(plastics?) so the corpse welfare can continue to flow.
          meanwhile, i can only legally sell a tomato, carrot or egg on-farm,lol.
          and get no ag exemption, nor government money for any of them.

    1. Pintada

      From the Global Times:
      “The Chinese People’s Liberation Army (PLA) on Monday continued military exercises and training activities surrounding the island of Taiwan, marking an extension from the previously announced schedule. Drills like these will not stop and are expected to become routine until reunification, as the Chinese mainland shows its determination to push forward the reunification process after US House Speaker Nancy Pelosi’s provocative visit to the island last week that seriously violated China’s sovereignty and territorial integrity, experts said.“

      Has no one else seen this?

    2. Yves Smith Post author

      Our Covid Brain Trust, which includes KLG, a professor of biochemistry who has done bench work, rejected your claim about US biochemicals out of hand:

      Ignacio:” ‘High end biochemicals?’ Bullshit, IMO. Ask for a list of those ‘high end biochemicals’ that China so sorely needs.”

      KLG: “What Ignacio says!”

  2. Lex

    I’m over my skies in terms of deep knowledge here, but is there a chance that some of this is planned bluster? That is, the US loves to bluff and bluster; it simply can’t help but take the bait. Is China drawing the US into doing long-term dumb stuff (not that we need any help)? For example, the “we might force Pelosi out of the sky, we certainly could” gets read in the US as a bluff/threat that demands Pelosi go, when the real goal was for Pelosi to go to open up a reason for current actions. Threatening economic war openly as a poke to get the US to open more economic war giving China the “just war” excuse.

    I’ll admit, it’s a bit far-fetched and I am not saying this is what’s happening. I’m not enough of a China watcher to make those calls in the grey area of real intentions. But goading then US into stupidity is both relatively easy and almost assured success. Is it possible?

    1. PlutoniumKun

      China does have a history of public bluster and posturing. There is extreme sensitivity over ‘past humiliations’ which can make it quite hard for Beijing sometimes to just keep schtum when that is often the best option. A fairly recent example was with ROK over its THAAD roll out. This did a lot of unnecessary damage to Chinese-Korean relations for no particular good reason.

      Ultimately, I don’t think China is all that concerned with external views of its statements, and isn’t always very skilful at knowing how it is received in other capitals (this is something it shares with the US and Japan). It is almost all for domestic consumption. The social contract between the Chinese people and the CCP involves lots of levels, but the notion that its the CCP’s job to prevent past humiliations is a very strong element of it. IMO, this leads them to over-reacting in situations when a more subtle approach would be far more successful. The idea that the Chinese only think long term and aren’t subject to knee jerk decision making is one only held by people who have not followed Chinese foreign policy for a few decades.

      1. John

        Whenever China’s government says something that seems to go too far or seems oblivious to anyone’s opinion, I recall the response of Emperor Qian Long to the requests, demands, of the Macartney mission of 1793. The Emperor had no idea, nor I suspect would have cared, that his letter was taken as deeply insulting by the British. You don’t suppose that their are lingering imperial genes in the administrative-diplomatic DNA of present day China, do you?

        1. Michaelmas

          John I recall the response of Emperor Qian Long to the requests, demands, of the Macartney mission of 1793. The Emperor had no idea, nor I suspect would have cared, that his letter was taken as deeply insulting by the British

          I was going to mention this.

          Qianlong, like other Chinese monarchs before him, considered all other states to be only tributaries to the Central Kingdom. The Macartney mission was thus perceived as a tribute delegation and the gifts brought for Emperor Qianlong as articles of tribute. Simultaneously, the British ambassadors were told to kowtow — kneel and touch the ground with their foreheads in worship and submission — while in the Emperor’s presence.

          The Chinese letter ran, in part, as follows: “Our dynasty’s majestic virtue has penetrated unto every country under heaven, and kings of all nations have offered their costly tribute by land and sea. As your Ambassador can see for himself, we possess all things. I set no value on objects strange or ingenious, and have no use for your country’s manufactures.”

          Events proceeded. Eventually, in 1839-42 the First Opium War began and with it the ‘century of humiliation.’

          The internal politics and socioeconomics of this war on both sides, and also globally, are fascinating. For instance, the main driver in the West was —

        2. Tony Wright

          I don’t know about imperial genes, but Xi certainly appears to have imperial aspirations, on several different levels.
          As for punishing US allies rather than the US itself (sort of a kick the dog syndrome), here in Australia exporters of wine, seafood, beef and barley have been hit with all sorts of bans and tariffs based on BS accusations of dumping, disease etc. This is the CCP response when mid-tier countries fail to kowtow to Beijing’s dictates, in Australia’s case punishment for not acquiescing to surveillance via Huawei 5G and having the temerity to suggest independent investigation of the origins of Covid19.
          Consequently I would suggest that if China does succeed the US as the dominant world power as many have suggested, we will be replacing one global bully with a far worse one.
          I would further suggest that the prescription opioid epidemic in the US, fuelled by Chinese manufacture and promotion by unscrupulous US big Pharma is not accidental. Payback?

          1. Jams O'Donnell

            ” fail to kowtow to Beijing’s dictates”

            But you are presumably happy to ‘kowtow to Washington’s dictates’

            Why is that? I mean the US has made war etc on 70+ countries since 1945, and is an aggressive, lawless entity, while the Chinese – 3 / 4 wars at the most, and likes to abide by UN rulings.

      2. Thuto

        China, like Russia, seems to have decided that there’s nothing to be gained from investing geopolitical capital in maintaining a reputation for pragmatic, consensus seeking diplomacy in international relations when dealing with the west. As Lavrov’s sharp-tongued “i don’t care about the eyes of the west” rejoinder to that BBC journalist who prefaced his question with “in the eyes of the west” demonstrates, there’s a growing appreciation in Beijing and Moscow that there are no dividends to be earned for being subtle and “turning the other cheek” when your primary adversary and her army of vassals long ago threw out that playbook and instead conduct foreign relations through hubris, threats and belligerence. There’s a type of geopolitical Gresham’s dynamic playing out where bad diplomacy is crowding out good diplomacy and it’s not China or Russia that ushered in this era, it’s the US in its self-appointed role as the battering ram against a multipolar world that has forced other great powers to adopt this posture. IMO it’s been decided in Moscow and Beijing that diplomacy will be reserved for nations that actually practice diplomacy, not some counterfeit version where subordinating your national interests to those of the US is what secures participation in international affairs.

        As regards China being renowned for taking a long-term view of the world, IMO this remains broadly true but of course today’s nation states face a spectrum of threats they have to navigate, from short-term to medium to long-term so remaining adaptive and aligning decision-making and responsiveness accordingly is of paramount importance. In today’s complex and fraught geopolitical landscape, being adaptive trumps being typecast as one thing (e.g. a long-term operator) in my view.

        1. PlutoniumKun

          To a degree I would disagree with this. China has long been clumsy in its dealings with other countries in the region, especially the smaller Pacific states. Over decades China has had the opportunity to build up soft power with its near neighbours, but has never been particularly good at it, at least in comparison with ROK or India or Japan. I honestly don’t know if this is a cultural/historical thing, or just that its never felt the need for a softer approach. There are exceptions, but I’ve often been surprised at just how disliked China is in the region, including in countries with little to no obvious reason to distrust them.

          And there is plenty of history of China using blood curdling language in its dealings with the US and the west. I think a lot of what is going on right now has little to do with Ukraine and Russia (which I don’t think impinges on Chinese policy as much as we might think), but a real disappointment that things have not ‘normalized’ under Biden. I think China felt that it understood the US and that Trump was a manageable anomaly and was certain that the long term march of history was in its favour. I think China is still feeling its way around the ‘new normal’ of a highly aggressive and unpredictable US and this is why I worry that its not just Washington that might do something stupid.

          1. Thuto

            I think the timing of the Asean nations coming out with a joint statement so soon after the Pelosi debacle in support of the One China policy, and especially their opposition to “provocative” actions in the Taiwan strait, is a subtle dig aimed at the US. Nobody wants war in their backyard and the US, through its bellicose actions, just may be helping China cement stronger relations with its neighbours (except maybe irredeemable US vassals like Japan and SK). As Brian Berlitic likes to point out, a lot of the countries in the region have China as their biggest trading partner, and mutually beneficial trade is the ultimate “relationship normalizer” in international affairs. As such, I don’t think the window of opportunity is closed for the Chinese to right the past wrongs you reference in your comment, and I suspect they will. There’s also little doubt in my mind the US will keep up the chest-thumping and will continue stumbling from blunder to blunder (that’s what declining empires clinging on to power do), all the while bringing the region to the precipice of war, and this will be to China’s advantage imo.

            1. Thuto

              I’ll add to this that being disliked for historical reasons is not an impediment to forging diplomatic relations in the present and solidifying them in the future. States build relations on a foundation of, and in pursuit of, common interests, and where these exist, one set of people need not necessarily like another set of people for diplomatic relations to blossom between the two.

              1. Thuto

                On a final note, US actions are widening the “common interests” surface area with other nations in the region that the Chinese will be all too happy to exploit. If China squandered its opportunity to create regional soft power in the past, I believe the US is frittering away the soft power it does possess in the present through its actions.

                1. Michaelmas

                  I believe the US is frittering away the soft power it does possess in the present through its actions.

                  ‘The Great Arrogance’ is one Farsi term they use in modern Iran to refer to the US.

                  As for US soft power, I don’t know that in 2022 it has much left internationally, beyond having bought and paid off the elites of various countries

  3. Tom Pfotzer

    China could, and should use its reserves to:

    a. Fund Belt and Road projects. Build new export markets
    b. Buy resources. Do metals, foodstuffs investment in South America and Africa, fossil fuel in Iran, Russia, etc.
    c. Invest in domestic renewables
    d. Invest in village-scale food and materials production in their hinterland, and along the railways

    I would have no trouble finding highly useful ways to put all that money to work.


    and few things would rile up the U.S. more than those projects successfully executed.


    And of course, U.S. nationals would notice, and would wonder aloud why our country wasn’t making those sorts of investments.

    1. Louis Fyne

      China is running out of domestic Chinese mega-engineering projects (bridges, roads, trains, sewers, etc.) because so much money has been thrown at infrastructure over the past 20 years. nothing left to build. scale of stuff built is mind-boggling.

      Belt-Road is a natural place to put all those workers, companies, knowledge to use

      1. Tom Pfotzer

        Louis: yes, certainly BRI has plenty of run-room left, and should be prosecuted vigorously.

        It’s important to keep in mind that the world’s productive capacity often exceeds demand. That pattern has repeated many times. Automation makes this phenomenon happen earlier, faster, and more … for each of the repeating cycles.

        That’s why all the fights over “export markets”. That’s what BRI is expected to do for China – give it some addn’l export markets to get a yield off all that production investment.

        There is a looming, systemic, world-wide economic force that is wreaking havoc on the developed economies. That force needs to be better understood and more effectively addressed.

        That “force” is automation. Automation is relentlessly wringing labor out of the production equation. With each cycle of new production investment, less labor is required to run it.

        Factoring labor out of the production equation means that less wages are available to soak up all that production. This has run to extremes here in the U.S. Hence all the “bullshit jobs” and stim-bucks and transfer payments like DoD, for ex – DoD can accurately be described as the U.S.’ major labor program.

        All those programs are band-aids to address the fact that labor has insufficient role in the real economy production activity.

        Which brings up the question of how to structure an economy such that labor – which is what most of us sell/provide – such that labor has a continuing and vital role in production. That is, IMHO, the major problem facing the developed economies of today.

        And that, of course, is why I advocate for a cyclic economy, as contrasted with the once-and-done economy we have now. Build once (using scale if that’s applicable) and re-use, repair, refurbish, and then finally recover the materials contained in each manufactured item.

        Those “cyclical” functions I’m advocating for use a lot of labor, and those cyclic functions also have great potential to drive down total life-cycle costs of all classes of machinery.

        The cyclic economy would take a great deal of pressure off the environment. A great deal of pressure. Mining, manufacturing, transport – all big energy and resource consumers – would be gradually curtailed.

        Lastly, China’s, Russia’s, and now even the U.S.’s hinterlands are starving for investment, and are great theaters for cyclic-style facilities build-out.

        So I suggest that we look forward a few years, and model out where the intensive-scale, concentration of wealth strategy is going to position us, and decide if that’s what we really want.

        1. Ron Rutter

          Excellent comment Tom. I wonder what percentage of US GDP is merely churning MONEY, producing nothing of value.

    2. dftbs

      It seems to me that these are nearly all happening. The thesis that China needs a paper re-invest of its USD surplus because it lacks domestic demand for its production was not wrong, but it is in the rear-view mirror. The Chinese have begun to wind down their reinvestment in US debt. The consumptive power of the marginal US dollar China receives is now being directed towards capital investments to increase domestic consumption, as well as those directed at increasing non-western consumption. I suspect that the Chinese shift from dollar recycling towards capital investment has contributed to the haircut on the dollar relative to goods and commodities.

      1. Spoofs desu

        I think you’re mostly correct. Though I would say that it lacks domestic demand because they are forced to save, as a result of a very explicit policy of running current account surpluses. In fact, running a current account surplus is the same thing as holding down national income and the value of your currency.

        Note that if one country/currency has a current account surplus, I.e. you produce more than you consume, then another country/currency must have a current account deficit., I.e you consume more than you produce. The u.s. has been consuming more than it produces ever since the dollar was floated I the mid 70’s.

        I think we are in the beginning stages of going back to being producers. Hence all the maniac hoopala going on in the world these days. It is going to be a tough transition for Americans to actually to start adding value, I.e producing something of value besides Hollywood movies.

        1. Tom Pfotzer

          I second this. We need to transition from Consumerism to Producerism.

          However, as I stated above, our real economy is already extremely labor-efficient, and getting more so every day. When those factories are re-shored, they’re going to be the most labor-efficient factories in the world, since they are most-recently built.

          We’ll get a good bloom of labor usage during build-out, and then it will fade, and we’ll be looking around for new export markets, which will be highly competed for by other countries, and not just China. India, Russia, Korea, Viet Nam, Japan, etc. all producing the same tradeable goods.

          Restoring our productive capacity is a great idea. The question now turns toward “what type of production” and “what design of the economy”.

          What if, instead of putting so much emphasis on labor efficiency, we put that emphasis on energy and materials efficiency?

          Let workers earn more via cyclic, re-use tasks, and drive down product life-cycle costs to compensate for higher wages (more functions actually needing labor)?

          Then we’d have more sustainable domestic demand, the economy will be much better balanced, and we’ll put a big down-payment on ecological restoration via re-use econ design strategy.

          1. Michaelmas

            Tom Pfotzer: When those factories are re-shored

            Pretty to think so.

            Personally, I suspect we may see Africa getting the factories and US corporate investment that China used to get before we see those factories re-shored.

            1. Tom Pfotzer

              Michaelmas: You may be right, but some factories may well elect to re-locate here in the U.S. if the mfg’g processes have a low enough labor input requirement.

              I’m curious to see where the cross-over point is between falling labor requirement and high transport cost (import-related).

              Transportation is really getting expensive. Not just the ship, but also the rail and truck after the trans-atlantic leg up from Africa.

              1. Copeland

                Lets not forget that before much longer congress/The Supremes/POTUS will have dismantled any and all regulation regarding silly stuff like not polluting too much, not using up natural resources, not paying CEOs/Wall Street a gazillion times as much as the workers, and maintaining a happy and healthy workforce. Under these “much improved” business conditions, the USA will once again become a manufacturing tour de force!

        2. dftbs

          I’m not so sure that the Chinese run an explicit policy of account surplus, but they certainly do seem to use their currency policy effectively as a release valve for excess productive capacity. All-in-all, the Chinese problem of overproduction is not a bad problem to have, so long as you escape the gravity of capitalism that requires increasing marginal returns to capital above all else.

          This is certainly a better position to be in than that of the US. I would disagree with you that “we [I presume the USA] are in the beginning stages of going back to being producers.” I don’t think the mechanisms and boundaries of the American polity allow for the dramatic change in power required for the US to go back to being producers. I would argue that the transfer of physical capital and expertise from the US to China at the end of the 20th century wasn’t “short-sighted” but rather the culmination of a century long class war, it was the coup de grâce of the Capitalists against their domestic working classes. The great irony in this is that the Chinese turned out to be more effective communists than the Soviets ever were.

          Now that we’ve (thank you Madame Speaker) pushed the Chinese to the edge, we may see more creative uses for China’s dollar surplus than those highlighted in the article. As commenter eg notes below, “Wouldn’t the foremost reason for China to reduce its stock of $USD reserves simply be to avoid having them stolen as the US State Department has apparently discovered a sudden fondness for?” I think that buying Japanese or Turkish debt leaves the Chinese exposed to this new geopolitical risk. Instead of running that risk, they could probably generate a greater “return” by bolstering the infrastructure and defense capacity of US enemies in the Western Hemisphere. Shipyards for the Bolivarian Navy, J-20s over Havana, a canal across Nicaragua?

      2. Fazal Majid

        The Chinese would much rather buy productive assets like shareholdings in corporations than IOUs from Uncle Sam, but is blocked by CFIUS, and the EU is also reinforcing its regulatory arsenal since the purchase of German robotics firm KuKa 6 years ago.

    3. Robert Hahl

      If the Chinese are actually getting something for their money, that must cause inflation in the west, no? Perhaps this is what has really changed lately. I’ll believe that China needs US Treasuries for it’s own purposes when the total amount of them starts going up again.

      1. dftbs

        Absolutely. The Dollar and its vassal currencies don’t grease the supply chains like they used to.

    4. jsn

      While China’s dollar reserves are money sitting in a bank account, they’re not like money sitting in a household checking account. It’s a resource allocation the Chinese have made to support their economic policy and without a change to economic policy they are required to hold the position they are holding.

      Most of the article is about this point.

      Did you read the article?

  4. eg

    Wouldn’t the foremost reason for China to reduce its stock of $USD reserves simply be to avoid having them stolen as the US State Department has apparently discovered a sudden fondness for?

    Mind you, if that were the motivation, better to do so quietly rather than accompanied by a lot of noisy bluster.

    1. amused_in_sf

      Yes, that definitely seems to be one of the implications of the final few paragraphs. I don’t think they are threatening, though; they are warning about what could happen if the US keeps going down the reckless road it is on.

  5. Rodger Malcolm Mitchell

    You folks do realize that the U.S. government doesn’t need to sell Treasuries, don’t you? The sole purposes of Treasuries are:
    1. To provide a safe place for people and nations to store unused dollars, which stabilizes the dollar, and
    2. To aid the Fed’s control over interest rates.

    If China sold all its Treasuries, or allowed all to expire without renewing, the Fed could do one of two things:
    1. Nothing
    2. Buy the Treasuries itself. The Fed has infinite dollars to do so.

    Treasuries are NOT a loan to the U.S. government, which being Monetarily Sovereign, does not borrow dollars. They merely are a fiscal convenience over which the Fed has 100% control.

    All the concerns described in the article are ludicrous.

    1. Tom Pfotzer

      Thanks for this post.

      However, I have continually wondered why, if indeed the Gov’t doesn’t need to borrow, why they do so. The USG pays about $600 billion a year in interest payments.

      That’s a pretty expensive “fiscal convenience”.

      So, I’m not yet convinced. Please explain why it makes sense to pay that much, annually, for a convenience.

      1. Sibiryak

        …if indeed the Gov’t doesn’t need to borrow, why they do so.

        To enrich the lending class (apart from inflation concerns).

        1. Anthony G Stegman

          You may be onto something. Capital always needs somewhere to invest, and always need to hedge risks. Treasuries provide both.

        2. drumlin woodchuckles

          President Bush the Elder literally referred to the lending class as the “investing classes”.

      2. Samuel Conner

        If you have time and patience for it, this systematic survey of MMT might be helpful:

        This series, which I first read about a decade ago, was transformative for my thinking about government funding. In particular, the posts on “where does the deficit come from” — which established to my satisfaction that it is non-government decisions (private sector and external sector spending and savings choices) that drive the size of the US federal deficit — were especially helpful.

        I do not see a post title that directly answers your question “why issue interest-bearing debt rather than currency?”, but I think that the series as a whole may persuade you that this is a political choice (as is the self-imposed “debt limit” in US) rather than a necessity, and that leads one to wonder “cui bono?”

        US financial system could not operate in the form it has evolved into without interest-bearing default-proof debt. And, as others have noted, interest-bearing sovereign debt is essentially an ongoing transfer of funds from the public purse to the holders of the debt instruments, who are disproportionately powerful institutions and individuals.

        Interest-paying public debt is not a necessity, but given human nature, it may be an inevitability. But perhaps we’ll have a “political revolution” some day.

        1. juno mas

          interest-bearing sovereign debt is essentially an ongoing transfer of funds from the public purse to the holders of the debt instruments, who are disproportionately powerful institutions and individuals.

          Treasuries are now more accessible to the proles. Treasury Direct allows access by individuals using the Web and Quicken (or other finance software) to keep track of purchases.

          It becomes obvious that banks/lenders provide investment opportunities that are inferior to T-Bills (short-term), if you are comfortable managing your funds. As you mention, the Treasury is a service to banks (powerful institutions) and the long-term, secure, investment of generational wealth.

          Until, of course, you get “sanctioned” and lose your funds.

        2. Yves Smith Post author

          You still seem to miss the point. This is not debt save by convention. The Treasury debits its account at the Fed to make any payments, including of interest on Treasury bonds. Bond issuance happens later.

          The reason it stays the way it is it this is very well established convention and no one want to spend the political capital to try to educate the public and change it. There are VASTLY more important things to get done.

          The interest payments are not a transfer when the interest is in reality paid out of thin air. The interest is also to compensate for the expected loss of principal value to inflation over time.

          And looking at interest in isolation, even if this were a currency user like a state, is misleading. You need to look at the tax structure and the benefits/spending structure to determine in totality how progressive or regressive a government regime is.

          1. Rodger Malcolm Mitchell

            Exactly right, Ms. Webber. The federal government is Monetarily Sovereign. It creates dollars at will, from thin air. The sole purposes of taxes are:
            1. Primarily: To control the economy by penalizing what the government doesn’t like and by rewarding, via tax breaks, what the government does like.
            2. Incidentally: To provide demand for dollars by requiring tax payments to be made in dollars.

            The U.S. government cannot run short of dollars. Even if no taxes were levied, the government could spend, forever.

            That is why all the claims about Medicare and Social Security Trust Funds becoming insolvent are bogus. No agency of the federal government can become insolvent unless that is what Congress and the President want.

            We could have Medicare for All, Social Security for All, and College for All, and the government could fund them easier than the effort I put into typing his sentence.

            And don’t get me started on the fears about the size of the phony federal “debt” which isn’t really a debt.

            1. Rodger Malcolm Mitchell

              By the way, Ms. Webber, it’s clear many of your readers don’t understand Monetary Sovereignty. You might wish to recommend Stephanie Kelton’s book and/or my site at

              Those who don’t understand Monetary Sovereignty simply do not understand the very foundations of economics (and that goes for fare too many economics professors).

      3. Adam1

        Where does it say in the constitution that Congress has to pass laws that make sense?

        So the reality is that under current US law the FED is prevented from allowing the US Treasury from overdrawing it’s account at the FED. This means that the US Treasury must acquire reserve balances prior to it’s spending of those reserves so it usually resorts to Treasury auctions.

        While congress has prevented the US Treasury from just overdrawing it’s account, it has also required that the FED protect the inter-bank payment system which also relies on FED reserve balances. So this means that, absent QE, the FED must add an equal amount of reserve balances into the banking system when Treasury auctions occur or risk a spike in interest rates and a collapse of the payment system.

        So why do we continue this smoke and mirrors…? IMHO there are those who don’t understand the system and don’t believe the reality of how it works and then there are those we prefer to keep the illusion going that the government is broke and can’t afford to do anything more like national healthcare.

      4. Robert Hahl

        These interest payments are made primarily to induce dollar owners to not convert their money into something else of value.

        1. Rodger Malcolm Mitchell

          The interest payments serve two functions:
          1. To enrich and grow the private sector (aka “the economy”) and
          2. To help the Fed control interest rates.

          As far as the “inducement” you mentioned, even when rates were a tick above zero, people still bought T-securities. The Fed needs no inducement. If no one wanted to buy T-securities, the Fed has the infinite ability to buy as much as it wished.

          There is no federal need to convince people not to buy “something else of value.”

      5. Rodger Malcolm Mitchell

        Two reasons:
        1. Stabilizing the currency and controlling interest rates is an important function. The “convenience” referred to the ease of doing it via issuing T-securities, while staying within existing law.
        2. Paying interest costs the government nothing. The U.S. federal government creates dollars at will. It could pay $600 TRILLION, (not just billion) at the touch of a computer key.

        Now you should ask, “If the government can create infinite dollars at the touch of a computer key, why does it levy taxes? For the answer to that, go to

    2. Samuel Conner

      It’s also worth noting that the quoted article’s statement that a hypothetical increase in domestic spending to support internal consumption would result in greater indebtedness of the gov’t of PRC,

      ” as Beijing will encourage large fiscal transfers to the households (social security, unemployment benefits, food stamps, etc.) or the creation of new businesses to mitigate the consequences of unemployment. All this requires more money and, consequently, more debt.”

      is premised on the idea that governments must “source” their funding by issuing debt instruments, as opposed to by simply spending new currency into existence.

      I harbor a faint hope that the partial decoupling of the world economic system caused by COVID and the RF intervention in Ukraine may lead to more experimentation on the part of monetary sovereign governments, and perhaps that will lead to wider recognition of the true policy freedom (constrained, admittedly, by real resource and productive capacity limitations) such governments have.

      I don’t see “markets” adequately responding to the challenges facing humanity in this century; it’s going to require a lot of government intervention, and for that to be politically possibly, it may be necessary for the ideology of “we don’t have sufficient money to afford what needs to be done” to be overthrown.

      I’m not confident that this “political revolution” will happen. One occasionally sees a significant movement by individual leaders (John Yarmuth’s embrace of MMT looked for a time (to me) like it might be a watershed moment; alas, he is retiring) but the entrenched system of US misgovernance appears determined to not use fiscal policy to aid the population at large. Maybe RF or PRC will be able to do better.

    3. dftbs

      Of course the Fed can monetize the debt to infinity and beyond. But the repercussions of this would be felt in the bellies of all Americans, well perhaps not the very wealthiest, they’ll just have to keep their yachts docked.

      The Chinese selling all of their USTs would be equivalent to them saying that dollar is no good. They wouldn’t just sell their portfolio, they would stop accepting dollars altogether. And not just from the US, but from all their other trading partners.

      1. Oh

        If China starts to sell its UST’s on large scale panic would ensue and the value of the dollar vis a vis other countries’ currencies would plummet and the US would not be able to pay for anything with USD’s.

        1. Yves Smith Post author

          You asked to get whacked for this comment. This shows you fell for uniformed hysteria.

          First, the Fed can absorb 100% of China’s Treasuries without batting an eye. The fact that China has made this threat more than once means the Fed should be prepared. Moreover, the Fed is in a tightening cycle, so that that at the margin it wants lower bond prices, so some selling will be welcome.

          Second, Treasury traders would regard this as the buying opportunity of all time.

          Third, however, the Fed might step back (and also wink and nod to traders, the Fed is way too tight with the biggest Treasury traders) to make sure China got very bad prices. So yes, you might see a few days of disruption, but if so, that would be either by design or the Fed being slow to saddle up. But things would normalize very pronto.

          Forth, unless China stops all exports to the US, it will wind up taking dollars and then buying Treasuries or other US financial assets for yield. So the US most assuredly will still be able to use dollars. China cannot afford to drop the US as a customer without incurring mass unemployment.

          1. dftbs

            I agree that the Fed can, and would, “defend” the US Treasury market from a Chinese liquidation. Unfortunately the repercussions of this would be painful for broad swathes of the US population. People don’t eat assets and liabilities on a central bank balance sheet, and the trick of monetizing the debt is hard enough as it is at 9% inflation. That said, because we live in the worst timeline I think the Fed will find itself in this position without a Chinese liquidation.

            Yes, Treasury desks would see intermediation between the PBOC seller and a Federal Reserve OMO desk buyer as a great opportunity to capture a wide bid/ask spread. To your third point, the expectation of a Fed intervention and the minimal regulatory liquidity burden to holding USTs- HQLAs would likely see this play out over a few days with the Fed probably trying to punish the Chinese via realized PNL losses on every sale.

            But if we were to find ourselves at a place where China felt it needed to liquidate its UST portfolio (and by implication declared the USD “no good” in its bilateral transactions) it would mean that realized USD PNL would be the lowest of their risk concerns. I imagine it’d be the sort of scenario where defense industry demand would offset lost exports to the US, and they would avoid an unemployment crisis.

            I don’t think that this would happen precipitously, but I do think that the Chinese will continue to decouple (I know export volumes in dollar terms are increasing, 15% on the year, but I do wonder if this is reflective of physical volumes or higher prices). I also wouldn’t be surprised if they directed significant amounts of their capacity away from fulfilling Amazon orders and buying treasuries, towards more material support to countries that we perceive as antagonists.

  6. Spoofs desu

    “Therefore, it needs to run a current account (or trade) surplus. If it does not, China will face either

    more unemployment, for reduced exports mean that the Chinese exporters are forced to lay off workers,

    or more debt, as Beijing will encourage large fiscal transfers to the households (social security, unemployment benefits, food stamps, etc.) or the creation of new businesses to mitigate the consequences of unemployment. All this requires more money and, consequently, more debt”

    The above is only true if all else being equal. However, having a policy running a current account surplus is the same thing, by definition, as forced savings on the population. If the Chinese population is not forced to save then, by definition, they will not save, I.e. they will consume which in turn increases demand displaced by demand lost from exports. The Chinese could be considered to be better off if they consume more and not be forced to save less. The other side of the same coin is that Americans will forced to consume less, I.e run less of a current deficit, or even current account surplus (god forbid) .

    This article reminds me of those who always, or at least in the past would always say, the dollar won’t lose it reserve currency status because there is no other currency to replace its reserve status. But here is the take away, the global economy does not need a reserve currency and in fact would be better off with out one, for numerous reasons. The dollar is the last, post wwIi institution still standing and is poised for the dustbin of history. Which is okay.

  7. Radhika Desai

    I don’t think China is silly to threaten the dump treasuries for several reasons.
    1. Chinese holdings have been a matter of prestige for the US, as foreign holding generally are.
    2. There is a major shorfall in demand for Treasuries anyway, which the Federal Reserve has been making up big time.
    3. Dumping of US treasuries would be part of a larger decoupling of China from US, that would include reduction of trade surplus with that country and that woudl hurt the US far more, increasing inflation to even higher levels.

    1. Tom Pfotzer

      And, of course, dumping those treasuries would remove a lever the U.S. has over China.

      Ask Russia about that one.

      Let’s ask the question another way: “Why _would_ China maintain all those USD reserves”?

      I can think of just one good reason: to prop up USD-Yuan exchange rate, and thereby keep the goods flowing from China to the U.S.

      If the China-poking continues to ratchet up, then China-US trade is going to be the first casualty. It won’t be the exchange rate that causes the no-trade problem, it’ll be “no supply going through the chain” that causes the problem, and USD reserves are going to have no impact on that phenomenon.

      And, said trade-war actions, as we noted in the recent Russia debacle, can result in reserves being confiscated.

      Looks like some long-held assumptions about USD reserves are now in play.

      1. Alan Roxdale

        The seizure of Russian USD/EUR denominated funds is the elephant in the room here.
        The Chinese would be fools to keep such large foreign reserves in Treasuries the US could well redeem only into seized accounts.

      2. steve2241

        How soon before China insists that all exports from China be paid in Yuan?

        In God We Trust, All Others Pay In Yuan.

    2. Oh

      The two countries are caught in a death grip – the US needs China to hold UST’s so they can import cheap goods and China needs to trade with the US to keep their economy growing. Unless the US stops being belligerent and the two countries live in peace, trouble is staraight ahead.

    3. Yves Smith Post author

      Huh? I am a finance professional and have worked for and later had primary dealers as clients.

      I have never once heard your prestige claim. No one in the markets would buy it and in the end their opinion in the one that matters. If China thinks its ownership matters, well China is free to hold all sorts of self-flattering views.

      China hold Treasuries because it runs a big trade deficit with the US. and wants to do something with the cash rather than hold them as dollar deposits at banks. That size of the deposits would result in default risk. So all China holding Treasuries says is that it’s convenient because the market is very liquid and less risky than keeping them, say, at DeutscheBank.

  8. amused_in_sf

    My reading of the Global Times is much less blustery. The key phrase is “and reducing holding of US treasuries could become a precautionary option” and the last two paragraphs. Less “we will bury you” and more “why are you screwing up the good thing we have going?”.

    It’s true the piece ignores the incentives that China has to keep buying dollar assets, but the framing is that the US is the one taking action to destabilize the system, so I don’t think it’s too notable that they don’t mention the counterarguments to their main point.

    This is actually much more Rooseveltian than most of insane Taiwan commentary that US media outlets put out there, with their characterizations of China and ponderings of carrier groups. China is showing us that their shield is getting larger, and our sticks are getting smaller and worn out.

  9. spud

    as long as china relies on free trade to employ their people, the longer they will be a “QUASI” colony.

    that is the whole purpose of free trade, to colonize the world.

    the leadership that came after Mao thought they had it right. but what made america a super power was internal production/consumption.

    china is not ready for prime time yet, unlike russia that is. who i criticized for not acting fast enough, but i was wrong. russia had to really prepare for being in prime time.

    till china really gets ready and dumps the free trade route, they are merely lusting after the dollar, and trying to have it both ways, and relying on russia to take the brunt of the free traders.

    its simply not sustainable for the chinese, unless of course they are selling out. because the pressure is on them now, it will be relentless, very damaging, and it will not let up till they are on their knee’s.

    russia will not be on their knee’s begging.

    1. Richard

      “china is not ready for prime time yet, unlike Russia”

      This is the nut of it. China hasn’t figured out the game its in, probably because that game is western, evolved in Europe over a millennium. China has to learn it, then assess its position on the board, and decide on a strategy.

      An aside:
      Russia reminds me of 18th Century Prussia. Smaller, but more agile and focused, well led, successful against larger powers. The saying is Prussia wasn’t a state with an army, but an army with a state. Russia seems to be more than a bit of that too.

      A question:
      Why don’t they just buy gold?

  10. Anthony G Stegman

    Back during the good old days of Cold War 1.0 the United States and the Soviet Union were often described as two scorpions in a bottle. Something similar can be said of the United States and China. They seemingly can’t live with each other, and they seemingly can’t live without each other. Each can do irreparable harm to the other, so rather than a direct confrontation they both poke and prod, back off a bit, poke and prod, back off a bit, and so on. No mortal blows are exchanged, but there certainly is no love fest either. Having said this, Taiwan is the wild card. For domestic political reasons both sides may take fateful actions they later will greatly regret. One can only hope that some wise statesman like personages will come forth and defuse the tensions before they completely boil over.

  11. David in Santa Cruz

    Fascinating analysis and comments. The fallacy here is that there is a rational individual named “China” who is engaged in a rational dialog with an individual named “USA! USA!”

    Nothing could be further from the truth. Over the past 30 years U.S. elites have become ever more abysmal in their ignorance and unpredictably irrational in their behavior. There was nothing “rational” about the looting of American industry by our elites; there was nothing “rational” about the invasion of Iraq, the occupation of Afghanistan, or the vandalism of Libya and Syria. The entire U.S. approach to the “Ukraine” crisis after the breakup of the USSR has been insane (I’ve always loved Diana Johnstone’s coining the phrase “The Queen of Chaos” to describe a certain U.S. elite).

    The leadership of the formerly socialist countries appear to be attempting to impose some sort of “order” on the world in the face of irrational U.S. actions. Their responses appear to be based more on emotion than cold economic calculation. As the U.S. sows, so shall it reap

    1. Anon

      Things that appear irrational, often require an adjustment in perspective to appreciate. It appears the US has lost nearly all its wars, including Ukraine; yet, people still get richer, and Virginia is still not irradiated. Meanwhile, the rising powers of the 21st century (Asia et al) have major conflicts on their doorsteps, all instigated and operated by remote control. A win in someone’s book.

      Racism, another seemingly irrational behavior, institutional or otherwise, ensures a healthy market for slave wages/labor (in all shades), both inside and outside prison. It is perfectly rational to charge inmates’ already challenged families exorbitant fees to use a century old technology to speak with their parents etc. A win in someone’s book.

      It is perfectly rational to destabilize what you cannot control. Suspend your morality, to see the rationale. Much of the material success ‘we’ have enjoyed is wrought from such activity…

  12. John k

    I think of Pettis as the China and finance guru. However, one assumption is that the us would be ‘better off’ with a smaller trade deficit… but Mosler, who I also think is a finance guru, thinks the deficit is a benefit; we get extra stuff for the treasuries (debt) we provide in exchange… no matter, I guess, that we have lost mfg jobs/capability as a result.
    Regardless, china’s treasuries have declined 25% over 9 years, during which we have purchased vastly more from China than we sold to them; had they collected treasuries for that they would now have trillions of dollars or treasuries. What happened instead?
    I read some time back China clamped down on us real estate and some corp purchases, while other corp sales to China were banned by the us. It appears that one of Pettis’ options, purchasing other us assets, is not favored. So where did it go? Perhaps to undeveloped countries.
    I more recently have read of china’s belt and road investments. It seems these major rail/port infrastructure expenditures are often loans to the host country designed to be paid with revenues from the new transport asset, and at lower rates than, say, imf loans. Seem to be the kind of win-win deals not on offer from the west.
    Beyond that, imo China has been buying/storing commodities, e.g. filling their strategic oil reserve as we sell ours. So far they have ‘divested’, or not acquired, us 200+b/year as we fund their ROW investments.
    This means others are holding the dollar assets China has put into the infra/commodities that China sees as better investments than us assets. As we move into a multi polar world other countries might begin to emulate china’s avoidance of collecting dollar assets; the many countries running continuous trade surpluses with the us may realize they don’t really need to forever grow those assets, they’ll just get more next year. Plus, as trade shifts away from the west, more and more transactions will be in non-dollar currencies, reducing the need to hold us$. If so, the dollar and our trade deficit will eventually decline. Slowly at first…
    I also note Japan seems to be shifting away a bit from holding $, and saudi seems to be willing to sell oil for yuan, quite logical as they buy a lot from China.
    Meanwhile it seems China would like to shift away from excessive domestic real estate and infra spending. Chinese worry about their old age and health, so hope to fund their future needs with present real estate investments. China needs to shift from domestic infra to an improved social net, more care givers, less construction workers… and their pop is aging fast as a result of their previous one-child policy and current reluctance of women to have kids in the absence of childcare.

    My optimistic hope is that a falling dollar would result in our our foreign adventures becoming unaffordable. On the plus side, demand for labor here would shoot up as import prices rise, though the transition to living with just what we produce ourselves would be difficult.

  13. Richard Kirchhofer

    Not many understand that since the US gave up on the Gold Standard in 1971 (because it was going broke funding the Vietnam War) USTs became defacto Gold in settling trade balances. The US produces Treasuries easily with large deficits (to pay for Ukraine funding and the like) and trading partners have to take then because the US only buys in Dollars. USTs are how the US gets its way in the world and China can’t do anything about it except become a less export-based economy. And is failing miserably at doing so. Thus, baring accidents or the desire for suicide, don’t expect the Chinese to do anything too serious. See Michael Hudson.

  14. G Mac

    I have thought about this for a while and came up with an idea. It could be completely bogus but on the other hand it would dot some i’s and cross some t’s.

    First, like any good economist, assume a can opener oops sorry assume:

    * That BRICS+Friends are serious with regard to their own SDR/Bancor;
    * That their SDR/Bancor is stable, liquid and transparent.


    * For any BRICS+Friends that has US debt (particularly to the rogues gallery of World Bank/IMF) and the debtor agree to terms, a country with surplus US Treasuries could perform a swap with that debtor in equivalent SDR/Bancor, possibly with additional collateral, although it would be unlikely the terms would be as onerous as World Bank/IMF neoliberal terms;
    * Debtor country then pays back USD loans with the US Treasuries from the swap.

    * Countries with surplus US Treasuries get rid of them – in theory – in a neutral fashion – no currency per se has been harmed beyond the SDR/Bancor, the pricing of which as above obviously needs to be figured out anyway;
    * The US Treasuries are disposed back to the US in neutral terms (no currency exchange);
    * Bonus: The World Bank/IMF no longer has as great a leverage over the debtor. Note the debtor is now under the aegis of the surplus country/BRICS+Friends replacements for the World Bank/IMF (again this has been talked about), but the idea is that the stick won’t be as sharp.

    * Figuring out the value of SDR/Bancor. But this was always going to be an issue – the above is just an application of the currency if it comes into being;
    * The creditor country now takes the risk (which is why it might be replaced by the new BRICS+Friends replacements for the World Bank/IMF)
    * US might be very unhappy about the loss control. Hmm to be clear – the US Treasury may not care, but the US NGOs would be, along with the US government.


    1. Tom Pfotzer

      I think it’s quite a nice feat of analysis and abstract thinking.

      You’ve ID’d the main issue, e.g. that the creditor country now takes the risk. However, you might extend your model to syndicate that risk across the participating countries in the program, so no one country gets whacked too much by a default on a single deal.

      Also need a “loan committee” whose task is to determine deal creditworthiness. That’s where all the politics will be.

      The main idea, e.g. “get rid” of Treasuries w/o sudden shocks, or having to fire-sale dispose/invest them is a very good idea, and timely.

      and the valuation of the SDR units, well, looks like we’re headed more toward a commodities-based valuation regime, and that actually makes things a bit simpler.

      Nice work. I’ll be very interested to hear what others think of it.

  15. Stephen

    The short term threat to dump Treasuries does feel an empty one; or at least one that would not hurt the US particularly. The article also mentions specific supply chains such as drugs where China does have short-term leverage, which feels reasonable.

    What may happen over time though is that China will decouple from the West. There is no intrinsic reason to run current account surpluses for ever; and to the extent that there is because of internal demand shortfalls then there are a number of ways that the resultant capital account surplus can be invested in real overseas assets. As noted by some comments above.

    If China really does succeed longer term in joining up the non EC / UK parts of Eurasia and Africa as a trading bloc via Belt and Road then one can perceive a ready area to invest capital and with the consumers to buy Chinese products. This is effectively lending money to these countries / acquiring their assets to enable them to buy Chinese products rather than doing so with the west. That is in terms of the fundamentals once we strip out the intermediating effect of all the various financial instruments and get down to the underlying economics.

    If that bloc then supplies cheap energy and other raw materials to China in Chinese currency then the circular trading flow works. In an extreme, implausible case this could even be a self contained autarkic bloc. Needing to sell cheap goods to the west and then buying US treasury bills with the proceeds would then simply not be a factor.

    Clearly, such a model is simplistic, long term and is not about Treasury sell off “shock and awe” threats. It is probably the most real broad strategic threat. Western terms of trade would suffer and living standards decline. By driving Russia and China together we have hastened this, of course.

    Increasingly, the question is whether we need Russia and China more than they need us or the reverse. Western views of our own power seem optimistic and misaligned with reality; Russia in particular may only now be perceiving her true power. Perhaps China is ahead of herself in her self view of power; as the Treasury sell off threat may evidence. Such misalignments of perceived and true power create precisely the potential for conflict we are seeing. Dangerous times, and the financial, economic and military agendas all intersect.

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