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China owns a considerable amount of American debt. If they sell it off, the result could be a major drop in the US dollar. Combining this with tariffs we coul

China owns a considerable amount of American debt. If they sell it off, the result could be a major drop in the US dollar. Combining this with tariffs we could see Russia in the 1980s style shortages (ie: nothing on the shelves). Countries which have been blockaded (ie: Cuba, Iran, Venezuela, etc) always have their economy drop. Doing it to ourselves is, in my opinion, self injurious.

nradov 7y ago
Who exactly would China sell that debt to, and for what? How would that impact the US dollar? They certainly aren't going to cut off exports to the US.
- jfengel 7y ago
  They can "sell" a lot of it back to the US government. The debt is held in bonds that mature. Big bondholders regularly roll their bonds over, so it acts as if they're just holding the same debt indefinitely. But some fraction of their bonds mature every month, and if they don't buy new ones, the government has to give them their money. It doesn't directly impact the dollar, per se, but it does mean that the government has to find the money elsewhere to continue operations. If it has to look harder, it will have to spend more, and that ultimately has to be backed by the taxpayer.
  - nradov 7y ago
    That's really not how US bond sales work in practice. The Chinese government is a relatively small player. And you didn't account for FOMC operations.
- neckeri 7y ago
  They could sell it back onto the open market and convert it to USD. Alternatively they could wait for it to mature and get USD. The key thing here isn't about the reserves, its how they they acquired them by creating a swap on USDCNY from Chinese exports from their reserves - effectively holding the Yuan from appreciation. The other thing is for the trade deficit to decrease the reserves need to decrease too. The reserves, especially the way they were created using swaps give a proxy of USD held savings held but not yet poured back into the US (and hence creating a trade deficit). This is all of course useless if the holder of those bonds is still China, but through another country such as Belgium with an overseas account - which they've done before.
adventured 7y ago
The Fed can trivially replace China's US debt holdings, just as they could with Japan if needed. They can run a $50 billion per month QE program - starting at any time - and permanently, calmly remove China from the equation and the US dollar would hardly notice. US households are sitting on $110 trillion in wealth for comparison to what a $1 trillion debasement by the Fed actually means (and that ignores the dollars outside the US). China's holdings are typically around ~5% of US national debt and declining (eight to ten years out, it will be 2.5% to 3% if nothing else changes; ie increasingly meaningless). It's ideal for all US debt to be held domestically if only to remove this constant absurdity that people fall for, the propaganda that China (or the Saudis et al) could do anything to injure the US using their very modest treasury holdings. So far the US hasn't actually done anything drastic with tariffs, even with regards to China. Mostly what Trump has done is use it as a bluff to get concessions, and that's mostly all that he will do. China may be the exception, as necessary. That may be warranted, the US should match China's barriers if China doesn't start opening up fair access & treatment re their economy.

nradov 7y ago

Who exactly would China sell that debt to, and for what? How would that impact the US dollar? They certainly aren't going to cut off exports to the US.

jfengel 7y ago
They can "sell" a lot of it back to the US government. The debt is held in bonds that mature. Big bondholders regularly roll their bonds over, so it acts as if they're just holding the same debt indefinitely. But some fraction of their bonds mature every month, and if they don't buy new ones, the government has to give them their money. It doesn't directly impact the dollar, per se, but it does mean that the government has to find the money elsewhere to continue operations. If it has to look harder, it will have to spend more, and that ultimately has to be backed by the taxpayer.
- nradov 7y ago
  That's really not how US bond sales work in practice. The Chinese government is a relatively small player. And you didn't account for FOMC operations.
neckeri 7y ago
They could sell it back onto the open market and convert it to USD. Alternatively they could wait for it to mature and get USD. The key thing here isn't about the reserves, its how they they acquired them by creating a swap on USDCNY from Chinese exports from their reserves - effectively holding the Yuan from appreciation. The other thing is for the trade deficit to decrease the reserves need to decrease too. The reserves, especially the way they were created using swaps give a proxy of USD held savings held but not yet poured back into the US (and hence creating a trade deficit). This is all of course useless if the holder of those bonds is still China, but through another country such as Belgium with an overseas account - which they've done before.

adventured 7y ago

The Fed can trivially replace China's US debt holdings, just as they could with Japan if needed. They can run a $50 billion per month QE program - starting at any time - and permanently, calmly remove China from the equation and the US dollar would hardly notice. US households are sitting on $110 trillion in wealth for comparison to what a $1 trillion debasement by the Fed actually means (and that ignores the dollars outside the US). China's holdings are typically around ~5% of US national debt and declining (eight to ten years out, it will be 2.5% to 3% if nothing else changes; ie increasingly meaningless). It's ideal for all US debt to be held domestically if only to remove this constant absurdity that people fall for, the propaganda that China (or the Saudis et al) could do anything to injure the US using their very modest treasury holdings. So far the US hasn't actually done anything drastic with tariffs, even with regards to China. Mostly what Trump has done is use it as a bluff to get concessions, and that's mostly all that he will do. China may be the exception, as necessary. That may be warranted, the US should match China's barriers if China doesn't start opening up fair access & treatment re their economy.