What Happens when The Fed and China Stop Buying U.S. Treasuries?
invite response
2014 May 25, 2:46am 40,150 views 181 comments
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smaulgld
2014 May 25, 9:57am
Now if they ignore this and restart QE, then we are fully Japan!
there is no other way
Strategist
2014 May 25, 10:20am
You guys worry too much about everything.
If I worried so much I would want to get paid for it.
Takes the same amount of time to analyze as it does to cheerlead.
I like puzzles. In many of my blog posts I questioned who would buy the T bonds if the Fed decided to stop QE. I had no answer. The Belgium buyer is inexplicable and unanticipated.
Look at it this way.....Who was buying them before we had the great recession?
smaulgld
2014 May 25, 10:31am
is inexplicable and unanticipated.
Look at it this way.....Who was buying them before we had the great recession?
China was increasing its purchases in 2004-2007
The Fed wasn't buying much and the deficit wasn't as great so there wasn't as great a need to sell T bonds
Strategist
2014 May 25, 10:37am
is inexplicable and unanticipated.
Look at it this way.....Who was buying them before we had the great recession?
China was increasing its purchases in 2004-2007
The Fed wasn't buying much and the deficit wasn't as great so there wasn't as great a need to sell T bonds
EXACTLY. We will soon reach that stage.
smaulgld
2014 May 26, 2:17am
is inexplicable and unanticipated.
Look at it this way.....Who was buying them before we had the great recession?
China was increasing its purchases in 2004-2007
The Fed wasn't buying much and the deficit wasn't as great so there wasn't as great a need to sell T bonds
EXACTLY. We will soon reach that stage.
When the government balances the budget? That is when there is no need to issue tbonds
Bubbabeefcake
2014 May 26, 2:45am
is inexplicable and unanticipated.
Look at it this way.....Who was buying them before we had the great recession?
China was increasing its purchases in 2004-2007
The Fed wasn't buying much and the deficit wasn't as great so there wasn't as great a need to sell T bonds
EXACTLY. We will soon reach that stage.
When the government balances the budget? That is when there is no need to issue tbonds
EXACTLY! and we'll never ever reach that stage.
indigenous
2014 May 26, 2:49am
EXACTLY! and we'll never ever reach that stage.
Yes we will, when the country collapses the assets will be sold off for the current market price/barter and that will be that
Strategist
2014 May 26, 3:17am
EXACTLY! and we'll never ever reach that stage.
Yes we will, when the country collapses the assets will be sold off for the current market price/barter and that will be that
The country just hits an all time high in the S&P 500, and you guys think the country is collapsing.
Sick sick sick.
smaulgld
2014 May 26, 3:21am
The country just hits an all time high in the S&P 500, and you guys think the country is collapsing.
Sick sick sick.
the "country" hit an all time high?-that is like saying casino profits are up so the country is doing well- there is a severe disconnect between the health of the economy and the stock market
bootleggers made a lot money during the depression
indigenous
2014 May 26, 3:22am
The country just hits an all time high in the S&P 500, and you guys think the country is collapsing.
Smell the coffee!
Strategist
2014 May 26, 3:25am
The country just hits an all time high in the S&P 500, and you guys think the country is collapsing.
Sick sick sick.
the "country" hit an all time high-that is like saying casino profits are up so the country is doing well- there is a severe disconnect between the health of the economy and the stock market
The stock market is forward thinking. It generally precedes the state of the economy 9 months in advance. What the stock market is telling us today is that good times are ahead.
smaulgld
2014 May 26, 3:38am
It generally precedes the state of the economy 9 months in advance. What the stock market is telling us today is that good times are ahead.
yes in February 1929 as the stock market was booming it was "sending a signal" that good times in October were ahead!
Bubbabeefcake
2014 May 26, 3:43am
The country just hits an all time high in the S&P 500, and you guys think the country is collapsing.
Sick sick sick.
the "country" hit an all time high-that is like saying casino profits are up so the country is doing well- there is a severe disconnect between the health of the economy and the stock market
The stock market is forward thinking. It generally precedes the state of the economy 9 months in advance. What the stock market is telling us today is that good times are ahead.
Corporation buybacks, Ya Boy we're really cooking!
smaulgld
2014 May 26, 3:48am
Treasuries are the backing for our currency, making our currency less fiat than some people think.
Correct they create a collateral and I believe the Fed's willingness to print dollars to buy more actually provides further backing, when they stop the backing is gone
indigenous
2014 May 26, 3:53am
Since this conversation is somewhat morphed into a forecast.
Does this graph say recession at the end of this year?
Heraclitusstudent
2014 May 26, 4:01am
Who will buy the bonds?
Did you guys notice that the gov borrows a LOT less than it was in 2009?
Did you guys notice that the debt to GDP may well shrink this year, since less debt is emitted than the nominal growth of the economy.
Did you guys notice that the more the fed buy bonds, the more money there is in the economy, chasing yields, even as low as bonds?
Not only that, but the bonds held by the fed are part of the base money. This money can multiplied by bank lending, and chase more bonds.
China and Russia sell things for dollars? This means they essentially give them away for free.
You're thinking about this debt like something that has to be paid back. When did the gov EVER paid back the bonds held by the fed?
You should think of the fed as a black hole where debt disappears.
This is not the government going bankrupt, this is in fact cleaning the gov balance sheet.
smaulgld
2014 May 26, 4:06am
Did you guys notice that the gov borrows a LOT less than it was in 2009?
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Perhaps less than 2009 when the nearly one trillion was pumped in for the stimulus, but more than 2008 and before. The cumulative debt has grown to about 17 trillion from 11 trillion or so and the unfunded liabilities continue to grow.
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Did you guys notice that the debt to GDP may well shrink this year, since less debt is emitted than the nominal growth of the economy.
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Since there is no GDP growth so far this year the debt to GDP is a meaningless measure. Over the past five years the gdp growth has been about a trillion and the QE 4 Trillion so GDP growth unfortunately has been paid for with printing money
smaulgld
2014 May 26, 4:07am
You should think of the fed as a black hole where debt disappears.
This is not the government going bankrupt, this is in fact cleaning the gov balance sheet.
a good way of looking at it. But it is a non productive dilutive process.
Strategist
2014 May 26, 4:09am
Since this conversation is somewhat morphed into a forecast.
Does this graph say recession at the end of this year?
No it does not.
The 10 year has been dropping for more then 30 years a reflection of inflation.
smaulgld
2014 May 26, 4:14am
The 10 year has been dropping for more then 30 years a reflection of inflation.
the ten year has been more of a function of Fed "policy" than the market but then again by now they are the same thing
indigenous
2014 May 26, 4:17am
No it does not.
The 10 year has been dropping for more then 30 years a reflection of inflation.
I was referring to the fact that the 10 year had gone up at the end of 13 this might indicate a recession a year later i.e. the end of 14
smaulgld
2014 May 26, 4:22am
There is a difference between worried, and aware and prepared.
and you can't be prepared unless you analyze what is going on!
Worrying and cheerleading aren't analysis and are not a substitute for preparation.
Strategist
2014 May 26, 4:23am
No it does not.
The 10 year has been dropping for more then 30 years a reflection of inflation.
I was referring to the fact that the 10 year had gone up at the end of 13 this might indicate a recession a year later i.e. the end of 14
It was probably indicating the end of recession fears and the prospects of growth. The stock market seconded that.
smaulgld
2014 May 26, 4:24am
It was probably indicating the end of recession fears and the prospects of growth.
Last year the stock market was up huge-but the first quarter this year the GDP was flat
Strategist
2014 May 26, 4:27am
"Belgium" has bought 200 billion in four months!
You guys worry too much about everything.
If I worried so much I would want to get paid for it.
There is a difference between worried, and aware and prepared.
Anyone that has looked at the history of fiat currencies knows that the printer prints more and more until ultimately the fiat paper is worthless. As dollars approach infinity value of dollar approaches zero. Confidence will be lost before infinity.
Right now the record high stock market indicates the markets are confident that will not happen. They are still concerned about deflation. Not saying it could not happen in the distant future, but there is no sign of it on the horizon.
smaulgld
2014 May 26, 4:30am
Right now the record high stock market indicates the markets are confident that will not happen
Markets were confident during most of 1929 too- the stock market especially a manipulated one is not a good predictor of the future of the economy
indigenous
2014 May 26, 4:31am
It was probably indicating the end of recession fears and the prospects of growth. The stock market seconded that.
Bond prices are a known and acceptd indicator of the future economy.
smaulgld
2014 May 26, 4:32am
ond prices are a known and acceptd indicator of the future economy.
used to be you could look at bond prices, the price of gold and make assessments, today prices are as the Fed dictates them
indigenous
2014 May 26, 4:34am
today prices are as the Fed dictates them
that has been the case since the FED controls interest rates. Does that make the graph less prescient?
smaulgld
2014 May 26, 4:36am
today prices are as the Fed dictates them
that has been the case since the FED controls interest rates. Does that make the graph less prescient?
yes, before QE, the Fed controlled the fed funds rate which set the tone for market driven interest rates.
Since they have poured into the bond market buying MBS's and T-Bonds by the trillions they have become in effect THE market for those securities and therefore are setting and ensuring the rates they set rather than influencing interest rates.
Are China and Russia the fabled bond vigilantes? I don't think China can run a massive trade surplus with the USA and not hold Treasuries.
This is not the government going bankrupt, this is in fact cleaning the gov balance sheet.
Interesting analysis.
Does the bankruptcy of the Federal Reserve mean all of our, and the worlds', Federal Reserve Notes will be worthless?
What is needed is to open the Fed up to competition. Right now, we have a corrupt monopoly.
smaulgld
2014 May 26, 4:43am
I don't think China can run a massive trade surplus with the USA and not hold Treasuries.
China also needs to protect the value of the $1.2 trillion T-bonds they own as well as their trading relationship with the US.
They are moving to increase their gold reserves at the lower prices now I suppose to offset any drop in the value of their T bonds should the dollar plummet.
They are also trying to trade more with Europe and Asia and even to consumer more of their production at home to lessen the blow of reduced exports to the US as the demand for T-bonds drops taking with it a portion of the dollar's value making imports from China for the US too expensive.
smaulgld
2014 May 26, 4:44am
What is needed is to open the Fed up to competition. Right now, we have a corrupt monopoly.
no one with a monopoly gives it up voluntarily, indeed they try to protect it any way they can and expand it
Strategist
2014 May 26, 4:48am
This is not the government going bankrupt, this is in fact cleaning the gov balance sheet.
Interesting analysis.
Does the bankruptcy of the Federal Reserve mean all of our, and the worlds', Federal Reserve Notes will be worthless?
Yes. Totally worthless. The $17 trillion debt would also be worthless.
Ha ha ha - take that you rich Asians.
smaulgld
2014 May 26, 4:54am
Yes. Totally worthless. The $17 trillion debt would also be worthless.
Ha ha ha - take that you rich Asians.
If you look at the charts in the original post china has 1.2 trillion and the fed itself $2.4 trillion. Stiffing the Fed would be interesting.
indigenous
2014 May 26, 5:08am
used to be you could look at bond prices, the price of gold and make assessments, today prices are as the Fed dictates them
The simplicity of it is that when bond rates go up business has to pay more for money. This means business investment slows to some degree. This shows up in less economic activity. Irregardless of FED meddling.
smaulgld
2014 May 26, 5:20am
The simplicity of it is that when bond rates go up business has to pay more for money. This means business investment slows to some degree. This shows up in less economic activity. Irregardless of FED meddling.
yes but when bonds yeilds are artificially low, business investment becomes less "investment" and more speculation because if the underlying economy can't support a business, there is less incentive to invest in it irrespective of how low rates may be as there is less chance of a return
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The United States is able to incur massive deficits funded in part by foreign purchases of U.S. debt and more recently and increasingly through the Federal Reserve’s (the Fed) purchases of T Bonds as part of their multi-year/multi trillion dollar quantitative easing (QE) program whereby they print dollars out of thin air to buy them.
As a result of QE more than a few nations, notably Iran, Russia, China and Brazil have become increasingly concerned that the value of their T Bond holdings are being diluted by the Fed’s massive money printing campaign and have made efforts to reduce their need to hold dollars for settling their trade accounts. Last October, China called for the world to “de-Americanize†because “the destinies of others are in the hands of a hypocritical nation that have to be terminatedâ€.
Such calls to “de-dollarize†have increased and been joined by Russia as the west battles Russia’s designs on Crimea and Ukraine with economic sanctions. Most recently, Russia and China signed a 30 year gas deal that supposedly does not involve dollars for payment.
What happens when the Fed and China stop buying and Belgium can't cover the shortfall?
Here is an analysis and list of the largest foreign holders of U.S. Treasuries as of March 2014 and of the top gold holding countries:
http://smaulgld.com/foreign-holdings-u-s-treasuries/
#investing