A couple months ago, I hypothesises about the possibility foreign treasury dumping:
It is becoming clearer and clearer that America cannot and will not produce a coherent economic strategy. China seems to be beginning to offload not only its Treasury balance, but also its dollar pile.
Then I noted some of the prospective dangers:
So — as Japan enters its third lost decade — is the United States headed for a growth-free and deflation-heavy future?
Well, Japan has been in a state of stasis supported by debt. While its government has massive debts — over 220% of GDP — these debts are predominantly owed to domestic creditors. Japan also has a very high personal and household savings rate. America, on the other hand, is in huge debt to hostile foreign creditors, but not only this, monetary easing is not so much a domestic policy as it is an international one, because of the dollar’s role as the global reserve currency. Essentially Japan’s slowdown and life-support was never quite as threatening to its ability to produce the necessary goods and services as America’s. Japan is less dependent on imports than America, which relies on its largest creditor to export vast quantities of consumer goods, basic materials and components. Japan does not have the same corrosive trade deficit with China.
If — as mainstream economists hope — China can be patient enough to allow America to resolve its problems, and manufacture more at home then inflation is very unlikely. America may stumble through a lost decade, before new technologies, and new business models finally pull America out of the slump. American policy makers might even have the foresight to let failed business models fail and liquidate failed businesses, allowing for new growth to take root, and avoiding Japanese zombification.
If China, on the other hand, decides that it is sick of being America’s industrial base then both nations could face significant problems Entering into a trade war with a nation that holds so much of America’s debt, and produces so much of the goods that sit on American shelves is an extremely risky proposition. A drastic fall in goods circulating in America — as the result of Chinese export tariffs, yuan flotation, or an outright export ban — could be a .flashpoint
These views were later franked in a Wikileaks cable by former US Ambassador to China, Jon Huntsman:
The Shanghai-based Shanghai Media Group (SMG) publication, China Business News: “This time the quick change of the U.S. policy (toward China) has surprised quite a few people. The U.S. has almost used all deterring means, besides military means, against China. China must be clear on discovering what the U.S. goals are behind its tough stances against China. In fact, a fierce competition between the currencies of big countries has just started. A crucial move for the U.S. is to shift its crisis to other countries – by coercing China to buy U.S. treasury bonds with foreign exchange reserves and doing everything possible to prevent China’s foreign reserve from buying gold.
And now we get the news that creditors are currently engaged in a huge Treasury liquidation.
Via Zero Hedge:
Little did we know 5 short days ago just how violent the reaction by China would be (both post and pre-facto) to the Senate decision to propose a law for all out trade warfare with China. Now we know – in the week ended October 12, a further $17.7 billion was “removed” from the Fed’s custodial Treasury account, meaning that someone, somewhere is very displeased with US paper, and, far more importantly, what it represents, and wants to make their displeasure heard loud and clear. Whether it is China – we do not know: we may have a better view in two months when the September/October TIC data hits, but even then it will be full of errors, as Direct Bidder purchases by the UK usually end up being assigned to China at the yearly TIC audit. And the sellers know this all too well. What they also know is that over the next few days (or weeks – ZH tends to be a little “aggressive” in its estimates for popular uptake), as soon as the broader population understands what has transpired, concerns about the reserve status of the greenback will start to resurface, precisely as many have been warning. And what has happened is that in six consecutive weeks, foreigners have sold $74 billion, or more government bonds in a sequential period of time than ever before.
So… perhaps it is time to reevaluate US intentions for a trade war with any of its “evil” mercantilist, UST-recycling partners. Unless, of course, they want $74 billion to become $740 billion, and to force the Fed to have no choice but to intervene, only this time not with a duration sterilized procedure, but one where the Fed has to buy everything that China et al are selling.
Americans might not like the fact that they are doubly dependent on Chinese manufacturing and Chinese treasury-buying and that this has left them with a huge vulnerability, but shouldn’t this really be viewed as an opportunity for America (and the West) to reindustrialise and decrease dependency on foreign energy? After all, a free lunch isn’t a good lunch if it leaves you vulnerable.
And with the ingenious method of sending QE money out to sit as excess reserves (instead of entering the economy and causing inflation) Bernanke & co may think that they have licence to buy everything, forever, with no additional inflationary burden, and while maintaining a strong dollar
The problem is that all of those dollars that have been liquidated out of Treasuries have to go somewhere, and a lot of them will go into buying up productive American assets. A flood of dollar repatriation is likely to have quite some inflationary impact. Maybe as Paul Krugman has said that could be a good thing, but maybe not.