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Is it me or would "china dumping us bonds" have absolutely no effect since the Federal reserve is already the only one buying us bonds in massive quantities ?

by bsaul 13y ago

jaekwon 13y ago
Yeah I don't think it would make much of a difference, with or without the Fed. They'd really have to try to spend the dollars & not just stick that money back into a bank, and the effects of that would be slow and noticeable in time for the US to react with some policy.
- wintersFright 13y ago
  umm, no. It would be the end of the USD as you know it, instant hyperinflation and empty shelves in your local supermarket. The point of dumping bonds is that they are saying they are worthless, they aren't trying to extract value from them by spending them somewhere else. That would render other Central Bank dollar denominated reserve assets worthless too. World trade, denominated in USD, would freeze, along with any American's relying on imported oil to warm their houses through the polar vortex. So no, it wouldn't be business as usual...if this were a real story.
  - camus2 13y ago
    It would mean war against China.Plain and Simple.
    - jaekwon 13y ago
      Lol. The US & China are like conjoined twins.
      - 1stop 13y ago
        Germany and England were pretty cosy too at a point in time.
      - alan_cx 13y ago
        Yeah, until China hypothetically dumps its bonds, which is what is being discussed. Good analogy though, because separating conjoined twins in a manner analogous to dumping all its bonds would kill both. The US economy would be in ruins, and the US would reply the only way it knows how, war. I suppose war is as much an economic tool as anything else. But there is another reason why China could never dump its bonds, it would destroy its biggest market, the US. Capitalism, the biggest force for peace we have....... (If reading that last bit made you feel nauseous, imagine how I felt typing it. Im trying to kid myself it's ironic, but its not working.)
  - jaekwon 13y ago
    Yeah, that's what I used to think. I think that line of speculation is wrong though. Why exactly would world trade freeze? Just because China says that they don't want to value their bond holdings anymore doesn't mean that others will follow suit.
  - bsaul 13y ago
    But china isn't the only one to use usd. Them saying "i don't give usd any value" doesn't means it's going to be true. At the minimum, USA will still use that currency no matter what, along with every US companies. And since The US haven't defaulted yet on their debt, US bonds will still have at least some justifiable value.
    - wintersFright 13y ago
      If China dumped bonds, why would anyone buy debt from the USG when they can get it cheap on the open market that has just had 1 trillion dumped in it. The fed steps in, mops up all excess demand so Uncle Sam can keep on spending beyond its tax revenue. Very quickly, no one is going to accept USD in trade as the value plummets. The USD being world reserve currency has been printed far beyond the needs for internal domestic trade. The US had to do this to lubricate world trade, however when the music stops all those dollars held in foreign banks will try and make their way home in order to obtain some value. A flood of dollars will then start bidding for goods and services from the US economy. Instant hyperinflation. The US haven't defaulted on their debt because the roll over their debt with more USD.
      - bsaul 13y ago
        My point was exactly what your last sentence said : they are already printing so much money and it doesn't provide inflation. Your point i guess is that china has 1 trillion in USD, which is such a huge amount that emitting this on the market will create inflation. I just checked the numbers, and in 2011 the second quantitative easing (aka "printing money") was 600 billions, and the third is 40 billions every month. And it doesn't have any impact on inflation (which remains a bit of a mystery to me, unless this money is instantly used by the banks just to balance banks internal debts and taken out of the economy).
        fennecfoxen 13y ago
        Yeah, the Fed buys crazy lots of bonds, and it's pretty impressive that it hasn't caused inflation yet. A big bond dump by China may be enough to actually trigger a substantial piece of inflation - heck, maybe you'd see an instant jump in prices of a few percent overnight, and the US would have to make some painful choices about spending and debt... But it wouldn't in and of itself cause catastrophic hyperinflation. Not on an ongoing basis, anyway. Continuing inflation requires continuing increases in the monetary base (or monetary velocity).
scoofy 13y ago
Umm... no, it's you. It would have a massive impact on the price of treasuries world wide.
- fennecfoxen 13y ago
  No, the Fed has unlimited buying power for Treasuries, so it could prop up the price as long as it wanted. The question is what the side effects of that would be. So perhaps I should say they can prop up the nominal price for as long as it wanted. The real price can't be manipulated so easily.
sirmarksalot 13y ago
The post isn't just meant to cause a monetary scare. It implies that World War III is about to start.
jackgavigan 13y ago
Well, a lot of banks, insurance companies, trust funds, mutual funds, pension funds, social security funds, other countries and individuals own US treasury bonds. China's holdings are significant - over $1.3tn or around 7.5% of all US government debt. If they were to dump all of it onto the market at once (a crazy idea which they would never do), the simple excess of supply over demand would cause Treasury prices to plunge and the USD would likely drop in the foreign exchange markets too. As soon as someone at one of the big US investment banks realised what was going on, phone calls would start being made to wake people up in London and then New York (this assumes that the sell-off starts during Asian trading hours) and eventually someone would wake up Bill Dudley (head of the New York Fed). He, in turn, would wake up Bernanke and Lew, who would call the President (who'd probably already have been woken up by the IC/military). By that point, the markets would be in turmoil. The combination of the sell-off with a big military move (i.e. declaring the South China Sea a closed zone) is interesting, because an increased likelihood of military conflict typically causes investors to sell riskier assets and buy less risky ones, like US Treasury bonds. So, stock markets would drop across the world - I'd say at least 3%, probably more like 5%. Buying gold and oil is like a bit of a kneejerk reaction in times of geopolitical turmoil, so those would probably rise. I doubt the increased demand from investors for Treasuries would be enough to absorb $1.3tn worth of bonds so Treasury prices would be dropping through the floor. That introduces a new dynamic because Treasuries are commonly used as trading collateral, so you'd start seeing margin calls, just like we did during the credit crunch (which is what caused Lehman Brothers to collapse). So, Dudley would almost certainly act to stabilise the market by instructing the Fed's trading desk to start buying Treasuries. I don't know what the practicalities are of the Fed buying $1.3tn at short notice (e.g. whether they can simply create that many dollars out of thin air and credit them to their counterparties' accounts) but, assuming they could, that would support the price of US Treasuries although yields would probably still end up jumping by at least 100 basis points, and the USD would probably drop significantly against the Euro. So, all in all, I'd be inclined to disagree with the idea that China dumping US bonds would have absolutely no effect. :-)
- fennecfoxen 13y ago
  > I don't know what the practicalities are of the Fed buying $1.3tn at short notice (e.g. whether they can simply create that many dollars out of thin air and credit them to their counterparties' accounts) Ah. Yes. They can totally do that. So the question is whether their extant open-market operations which aim for a particular interest rate on Treasuries will in fact buy the bonds quickly enough that substantial market turmoil would be avoided. And, if so, whether the increased supply of USD would have a higher velocity than it did when China was sitting on it, which could lead to a weaker dollar or substantial inflation. (And of course, people could just generally freak out anyway, leading to turmoil.)
penguindev 13y ago
Nail on the head award. Apparently you haven't taken enough college/graduate studies to unlearn common sense. Unfortunately, that disqualifies you from being an elite. To get those kind of jobs, you need to be for example a phd 'expert' on the great depression such that you come as close as possible to repeating it (biggest national housing and credit bubbles ever).

Is it me or would "china dumping us bonds" have absolutely no effect since the Federal reserve is already the only one buying us bonds in massive quantities ?

by bsaul 13y ago

Is it me or would "china dumping us bonds" have absolutely no effect since the Federal reserve is already the only one buying us bonds in massive quantities ?

jaekwon 13y ago

Yeah I don't think it would make much of a difference, with or without the Fed. They'd really have to try to spend the dollars & not just stick that money back into a bank, and the effects of that would be slow and noticeable in time for the US to react with some policy.

wintersFright 13y ago
umm, no. It would be the end of the USD as you know it, instant hyperinflation and empty shelves in your local supermarket. The point of dumping bonds is that they are saying they are worthless, they aren't trying to extract value from them by spending them somewhere else. That would render other Central Bank dollar denominated reserve assets worthless too. World trade, denominated in USD, would freeze, along with any American's relying on imported oil to warm their houses through the polar vortex. So no, it wouldn't be business as usual...if this were a real story.
- camus2 13y ago
  It would mean war against China.Plain and Simple.
  - jaekwon 13y ago
    Lol. The US & China are like conjoined twins.
    - 1stop 13y ago
      Germany and England were pretty cosy too at a point in time.
    - alan_cx 13y ago
      Yeah, until China hypothetically dumps its bonds, which is what is being discussed. Good analogy though, because separating conjoined twins in a manner analogous to dumping all its bonds would kill both. The US economy would be in ruins, and the US would reply the only way it knows how, war. I suppose war is as much an economic tool as anything else. But there is another reason why China could never dump its bonds, it would destroy its biggest market, the US. Capitalism, the biggest force for peace we have....... (If reading that last bit made you feel nauseous, imagine how I felt typing it. Im trying to kid myself it's ironic, but its not working.)
- jaekwon 13y ago
  Yeah, that's what I used to think. I think that line of speculation is wrong though. Why exactly would world trade freeze? Just because China says that they don't want to value their bond holdings anymore doesn't mean that others will follow suit.
- bsaul 13y ago
  But china isn't the only one to use usd. Them saying "i don't give usd any value" doesn't means it's going to be true. At the minimum, USA will still use that currency no matter what, along with every US companies. And since The US haven't defaulted yet on their debt, US bonds will still have at least some justifiable value.
  - wintersFright 13y ago
    If China dumped bonds, why would anyone buy debt from the USG when they can get it cheap on the open market that has just had 1 trillion dumped in it. The fed steps in, mops up all excess demand so Uncle Sam can keep on spending beyond its tax revenue. Very quickly, no one is going to accept USD in trade as the value plummets. The USD being world reserve currency has been printed far beyond the needs for internal domestic trade. The US had to do this to lubricate world trade, however when the music stops all those dollars held in foreign banks will try and make their way home in order to obtain some value. A flood of dollars will then start bidding for goods and services from the US economy. Instant hyperinflation. The US haven't defaulted on their debt because the roll over their debt with more USD.
    - bsaul 13y ago
      My point was exactly what your last sentence said : they are already printing so much money and it doesn't provide inflation. Your point i guess is that china has 1 trillion in USD, which is such a huge amount that emitting this on the market will create inflation. I just checked the numbers, and in 2011 the second quantitative easing (aka "printing money") was 600 billions, and the third is 40 billions every month. And it doesn't have any impact on inflation (which remains a bit of a mystery to me, unless this money is instantly used by the banks just to balance banks internal debts and taken out of the economy).
      - fennecfoxen 13y ago
        Yeah, the Fed buys crazy lots of bonds, and it's pretty impressive that it hasn't caused inflation yet. A big bond dump by China may be enough to actually trigger a substantial piece of inflation - heck, maybe you'd see an instant jump in prices of a few percent overnight, and the US would have to make some painful choices about spending and debt... But it wouldn't in and of itself cause catastrophic hyperinflation. Not on an ongoing basis, anyway. Continuing inflation requires continuing increases in the monetary base (or monetary velocity).

scoofy 13y ago

Umm... no, it's you. It would have a massive impact on the price of treasuries world wide.

fennecfoxen 13y ago
No, the Fed has unlimited buying power for Treasuries, so it could prop up the price as long as it wanted. The question is what the side effects of that would be. So perhaps I should say they can prop up the nominal price for as long as it wanted. The real price can't be manipulated so easily.

sirmarksalot 13y ago

The post isn't just meant to cause a monetary scare. It implies that World War III is about to start.

jackgavigan 13y ago

Well, a lot of banks, insurance companies, trust funds, mutual funds, pension funds, social security funds, other countries and individuals own US treasury bonds. China's holdings are significant - over $1.3tn or around 7.5% of all US government debt. If they were to dump all of it onto the market at once (a crazy idea which they would never do), the simple excess of supply over demand would cause Treasury prices to plunge and the USD would likely drop in the foreign exchange markets too. As soon as someone at one of the big US investment banks realised what was going on, phone calls would start being made to wake people up in London and then New York (this assumes that the sell-off starts during Asian trading hours) and eventually someone would wake up Bill Dudley (head of the New York Fed). He, in turn, would wake up Bernanke and Lew, who would call the President (who'd probably already have been woken up by the IC/military). By that point, the markets would be in turmoil. The combination of the sell-off with a big military move (i.e. declaring the South China Sea a closed zone) is interesting, because an increased likelihood of military conflict typically causes investors to sell riskier assets and buy less risky ones, like US Treasury bonds. So, stock markets would drop across the world - I'd say at least 3%, probably more like 5%. Buying gold and oil is like a bit of a kneejerk reaction in times of geopolitical turmoil, so those would probably rise. I doubt the increased demand from investors for Treasuries would be enough to absorb $1.3tn worth of bonds so Treasury prices would be dropping through the floor. That introduces a new dynamic because Treasuries are commonly used as trading collateral, so you'd start seeing margin calls, just like we did during the credit crunch (which is what caused Lehman Brothers to collapse). So, Dudley would almost certainly act to stabilise the market by instructing the Fed's trading desk to start buying Treasuries. I don't know what the practicalities are of the Fed buying $1.3tn at short notice (e.g. whether they can simply create that many dollars out of thin air and credit them to their counterparties' accounts) but, assuming they could, that would support the price of US Treasuries although yields would probably still end up jumping by at least 100 basis points, and the USD would probably drop significantly against the Euro. So, all in all, I'd be inclined to disagree with the idea that China dumping US bonds would have absolutely no effect. :-)

fennecfoxen 13y ago
> I don't know what the practicalities are of the Fed buying $1.3tn at short notice (e.g. whether they can simply create that many dollars out of thin air and credit them to their counterparties' accounts) Ah. Yes. They can totally do that. So the question is whether their extant open-market operations which aim for a particular interest rate on Treasuries will in fact buy the bonds quickly enough that substantial market turmoil would be avoided. And, if so, whether the increased supply of USD would have a higher velocity than it did when China was sitting on it, which could lead to a weaker dollar or substantial inflation. (And of course, people could just generally freak out anyway, leading to turmoil.)

penguindev 13y ago

Nail on the head award. Apparently you haven't taken enough college/graduate studies to unlearn common sense. Unfortunately, that disqualifies you from being an elite. To get those kind of jobs, you need to be for example a phd 'expert' on the great depression such that you come as close as possible to repeating it (biggest national housing and credit bubbles ever).