4 ms·

The worst case scenario is the rest of the world dumping US treasuries, and causing interest rates to skyrocket and USD to plummet.

alex_young 6y ago
Why would that happen because the fed owns a lot of mortgage debt? I don’t see the connection.
- remote_phone 6y ago
  Entities buy UST because there’s a demand for it. It’s considered the risk-free asset, so when you have billions in cash, you park them in UST because you know you can get it back. But instead of having natural demand for UST, the Fed has started buying UST which have driven down the interest rates. And they started buying mortgages to drive down those interest rates as well. But they’re doing it by creating money and buying them on the open markets. It’s basically monetizing their obligations which is unnatural and fake. So if (and it’s a big if) the markets decide they don’t want anything to do with this, and would rather buy a Japanese government bond, the markets would get flooded with those products, causing interest rates to spike. They would take the USD and sell them and buy Japanese Yen for example. Again selling USD would cause the price to drop relative to other currencies. Whether this is likely is another story.
JackFr 6y ago
The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars. They can buy goods or they can buy assets. They aren’t that interested in our goods, so they buy bonds. If they wanted to unload the dollars they certainly could, but that would weaken the dollar and strengthen the yuan and make it unattractive for the US to buy goods from them. Despite the Fed going where they have not before (and probably shouldn’t go) the world probably isn’t going to dump treasuries because of it.
- dternyak 6y ago
  > The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars. It strikes me as extremely odd that it's become so normalized that the U.S.'s role in trade is simply as a buyer of goods. In any transaction, both parties are typically better off after having made the transaction, else one party would refuse. The U.S. clearly benefits by acquiring goods, but is China really left scratching their heads with what to do with the dollars (and then throwing a dart and purchasing treasuries with their overflowing dollars)? If China (in aggregate) is never interested in buying our goods, why would they want to compound the number of tokens that can be redeemed for future goods (by buying bonds)? Do they simply not want to buy goods now, but know they will want to in the future? Are they entirely interested only in the assets, but think the goods are not valuable, or at least not valuable for them, but maybe are for others? Doesn't that put into question the value of any assets the country might have to offer if the goods that the country provides are seemingly undesirable? Clearly, the value the U.S. is providing can't simply be as the purchaser of a good. The U.S. is trading future obligations for current goods, and the trading partner must have some belief that they will eventually execute that option on future obligations, or trade the future obligation to someone else who will want to execute it, else this token clearly has no value. However, I do also wonder how much of the demand of U.S. dollar is simply a system of inertia. At some point the trading partners may realize they have no interest in acquiring tokens that they will never redeem, even if this token can be compounded further for more tokens that will never be redeemed. Currently, it seems China is interested in acquiring these tokens because of the reserve currency status, as they trade with other partners in. The other possibility is this entire narrative is incorrect, and there are other benefits to running massive trade surpluses beyond the future token redemption. Skill building could be one these benefits - the deficit trading partner (U.S.) is shaping the development of labor markets in an journeyman-like form.
  - adventured 6y ago
    > It strikes me as extremely odd that it's become so normalized that the U.S.'s role in trade is simply as a buyer of goods. It should strike you as odd, what you're saying is wrong. The US exports $2.5 trillion worth of goods and services, including $1.7 trillion of goods. The US is the world's #2 exporter of goods. With services included, the US is nearly the world's #1 exporter. In 2018, the US was behind China by only about $80 billion in total exports. That's nearly three times the #4 export country, Japan.
robfitz 6y ago
Also: * 70% of global trade is currently denominated in USD (oil markets, commodities, etc) * US has a lot of debt to other nations * USD is the global reserve currency, giving the US fairly unique economic power and security If the USD gets printed into significant devaluation in order to support assets (like bonds, houses, corporates, stocks), then it reduces the real value of the debts that the US owes to other countries (since denominated in USD), which erodes their faith as lenders. Taken together, this: * Erodes confidence in the USD as a global reserve currency and causes governments to look to other stores of value (e.g., government buying of gold has recently been at an all-time high) * Artificially inflates asset prices, leading to a bigger crash later when the government support is unable to continue (due to reduced confidence from foreign lenders) That's all pretty terrible for the US and USD, if it happens. But there's also an equally credible (though counterintuitive) theory that the USD will actually go up in value (deflation) due to every other country in the world needing to take similarly drastic action and the US being destabilized the least (i.e., the least bad of a set of bad options and everyone rushing into USD and US investments for relative safety). Plenty of very smart people are on both sides of this argument, but everyone agrees that we are buying ourselves some significant future pain.
nradov 6y ago
It is mathematically impossible for the "rest of the world" to dump US treasuries. If someone is selling then someone else is buying.
- seiferteric 6y ago
  The Fed buys them, also they expire so they can simply stop buying more.
adventured 6y ago
The ECB has 2x the portfolio size as a share of GDP as what the Fed does. The Bank of Japan's portfolio is about 4x the Fed on that metric. Why isn't the Eurozone collapsing, with interest rates skyrocketing and the Euro imploding? Somehow Japan is still managing - despite a public debt & budget situation several times worse than the US - with a GDP per capita still on par with Britain, France, and just below Germany. And yet all the armchair experts endlessly predict the demise of the US.
- baconandeggs 6y ago
  Because the US is the biggest debtor in the history of humanity and is supporting (in a symbiotic relationship) all those countries you listed who are also at risk of collapsing.
- pieno 6y ago
  Not really. ECB balance of assets purchased: €2.9tn(August 2020) Eurozone GDP: €11.9tn (2019) So 24% Fed balance of assets purchased: $6.3tn (September 2020) US GDP: $21.4tn (2019) So 29% Even if you look at total assets on the balance sheet (Including assets purchased outright and collateralised loans), the difference is not that huge: ECB: €4.7tn (39%) Fed: $7.0tn (32%)
  - mrep 6y ago
    Source for ECB? FRED says they've got about 6.458 trillion euros [0] and the english version of the ECB website says they had 4.6 trillion at the end of 2019 which also matches the FRED and they haven't updated it since then [1]. [0]: https://fred.stlouisfed.org/series/ECBASSETSW https://fred.stlouisfed.org/series/ECBASSETSW [1]: https://www.ecb.europa.eu/pub/annual/balance/html/index.en.html https://www.ecb.europa.eu/pub/annual/balance/html/index.en.h...
refurb 6y ago
Countries are buying US gov't debt because: 1) they have a lot of USD due to exporting goods to the US and 2) it's one of the safest places you can park money. Sure, it would be bad if they dumped treasuries (at a big loss), but why would they do that if they put the money there in the first place because it was safe?
- baconandeggs 6y ago
  They will dump them because they will need the liquidity.
  - garmaine 6y ago
    Or because they expect the era of stability to be over.
082349872349872 6y ago
Wouldn't the worst case (from the US standpoint) scenario be if the USD strengthened over time, and all these low-nominal interest loans not only had to be carried at higher real rates, but eventually come due at more than the original principal?

alex_young 6y ago

Why would that happen because the fed owns a lot of mortgage debt? I don’t see the connection.

remote_phone 6y ago
Entities buy UST because there’s a demand for it. It’s considered the risk-free asset, so when you have billions in cash, you park them in UST because you know you can get it back. But instead of having natural demand for UST, the Fed has started buying UST which have driven down the interest rates. And they started buying mortgages to drive down those interest rates as well. But they’re doing it by creating money and buying them on the open markets. It’s basically monetizing their obligations which is unnatural and fake. So if (and it’s a big if) the markets decide they don’t want anything to do with this, and would rather buy a Japanese government bond, the markets would get flooded with those products, causing interest rates to spike. They would take the USD and sell them and buy Japanese Yen for example. Again selling USD would cause the price to drop relative to other currencies. Whether this is likely is another story.

JackFr 6y ago

The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars. They can buy goods or they can buy assets. They aren’t that interested in our goods, so they buy bonds. If they wanted to unload the dollars they certainly could, but that would weaken the dollar and strengthen the yuan and make it unattractive for the US to buy goods from them. Despite the Fed going where they have not before (and probably shouldn’t go) the world probably isn’t going to dump treasuries because of it.

dternyak 6y ago
> The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars. It strikes me as extremely odd that it's become so normalized that the U.S.'s role in trade is simply as a buyer of goods. In any transaction, both parties are typically better off after having made the transaction, else one party would refuse. The U.S. clearly benefits by acquiring goods, but is China really left scratching their heads with what to do with the dollars (and then throwing a dart and purchasing treasuries with their overflowing dollars)? If China (in aggregate) is never interested in buying our goods, why would they want to compound the number of tokens that can be redeemed for future goods (by buying bonds)? Do they simply not want to buy goods now, but know they will want to in the future? Are they entirely interested only in the assets, but think the goods are not valuable, or at least not valuable for them, but maybe are for others? Doesn't that put into question the value of any assets the country might have to offer if the goods that the country provides are seemingly undesirable? Clearly, the value the U.S. is providing can't simply be as the purchaser of a good. The U.S. is trading future obligations for current goods, and the trading partner must have some belief that they will eventually execute that option on future obligations, or trade the future obligation to someone else who will want to execute it, else this token clearly has no value. However, I do also wonder how much of the demand of U.S. dollar is simply a system of inertia. At some point the trading partners may realize they have no interest in acquiring tokens that they will never redeem, even if this token can be compounded further for more tokens that will never be redeemed. Currently, it seems China is interested in acquiring these tokens because of the reserve currency status, as they trade with other partners in. The other possibility is this entire narrative is incorrect, and there are other benefits to running massive trade surpluses beyond the future token redemption. Skill building could be one these benefits - the deficit trading partner (U.S.) is shaping the development of labor markets in an journeyman-like form.
- adventured 6y ago
  > It strikes me as extremely odd that it's become so normalized that the U.S.'s role in trade is simply as a buyer of goods. It should strike you as odd, what you're saying is wrong. The US exports $2.5 trillion worth of goods and services, including $1.7 trillion of goods. The US is the world's #2 exporter of goods. With services included, the US is nearly the world's #1 exporter. In 2018, the US was behind China by only about $80 billion in total exports. That's nearly three times the #4 export country, Japan.

robfitz 6y ago

Also: * 70% of global trade is currently denominated in USD (oil markets, commodities, etc) * US has a lot of debt to other nations * USD is the global reserve currency, giving the US fairly unique economic power and security If the USD gets printed into significant devaluation in order to support assets (like bonds, houses, corporates, stocks), then it reduces the real value of the debts that the US owes to other countries (since denominated in USD), which erodes their faith as lenders. Taken together, this: * Erodes confidence in the USD as a global reserve currency and causes governments to look to other stores of value (e.g., government buying of gold has recently been at an all-time high) * Artificially inflates asset prices, leading to a bigger crash later when the government support is unable to continue (due to reduced confidence from foreign lenders) That's all pretty terrible for the US and USD, if it happens. But there's also an equally credible (though counterintuitive) theory that the USD will actually go up in value (deflation) due to every other country in the world needing to take similarly drastic action and the US being destabilized the least (i.e., the least bad of a set of bad options and everyone rushing into USD and US investments for relative safety). Plenty of very smart people are on both sides of this argument, but everyone agrees that we are buying ourselves some significant future pain.

nradov 6y ago

It is mathematically impossible for the "rest of the world" to dump US treasuries. If someone is selling then someone else is buying.

seiferteric 6y ago
The Fed buys them, also they expire so they can simply stop buying more.

adventured 6y ago

The ECB has 2x the portfolio size as a share of GDP as what the Fed does. The Bank of Japan's portfolio is about 4x the Fed on that metric. Why isn't the Eurozone collapsing, with interest rates skyrocketing and the Euro imploding? Somehow Japan is still managing - despite a public debt & budget situation several times worse than the US - with a GDP per capita still on par with Britain, France, and just below Germany. And yet all the armchair experts endlessly predict the demise of the US.

baconandeggs 6y ago
Because the US is the biggest debtor in the history of humanity and is supporting (in a symbiotic relationship) all those countries you listed who are also at risk of collapsing.
pieno 6y ago
Not really. ECB balance of assets purchased: €2.9tn(August 2020) Eurozone GDP: €11.9tn (2019) So 24% Fed balance of assets purchased: $6.3tn (September 2020) US GDP: $21.4tn (2019) So 29% Even if you look at total assets on the balance sheet (Including assets purchased outright and collateralised loans), the difference is not that huge: ECB: €4.7tn (39%) Fed: $7.0tn (32%)
- mrep 6y ago
  Source for ECB? FRED says they've got about 6.458 trillion euros [0] and the english version of the ECB website says they had 4.6 trillion at the end of 2019 which also matches the FRED and they haven't updated it since then [1]. [0]: https://fred.stlouisfed.org/series/ECBASSETSW https://fred.stlouisfed.org/series/ECBASSETSW [1]: https://www.ecb.europa.eu/pub/annual/balance/html/index.en.html https://www.ecb.europa.eu/pub/annual/balance/html/index.en.h...

refurb 6y ago

Countries are buying US gov't debt because: 1) they have a lot of USD due to exporting goods to the US and 2) it's one of the safest places you can park money. Sure, it would be bad if they dumped treasuries (at a big loss), but why would they do that if they put the money there in the first place because it was safe?

baconandeggs 6y ago
They will dump them because they will need the liquidity.
- garmaine 6y ago
  Or because they expect the era of stability to be over.

082349872349872 6y ago

Wouldn't the worst case (from the US standpoint) scenario be if the USD strengthened over time, and all these low-nominal interest loans not only had to be carried at higher real rates, but eventually come due at more than the original principal?