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What Happens when The Fed and China Stop Buying U.S. Treasuries?


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2014 May 25, 2:46am   39,837 views  181 comments

by smaulgld   ➕follow (4)   💰tip   ignore  

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 terminated”.

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

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1   smaulgld   2014 May 25, 4:14am  

APOCALYPSEFUCKisShostikovitch says

Yams.

Long yams.

There is no other option
How else will the US fund itself if it doesnt have the fed printing a trilion dollars a year to finance it
We must hit up the strategic yam reserves

2   HydroCabron   2014 May 25, 4:24am  

This whole panic is foolish: financial edifices, currencies, and societies are always changing. The idea that this is anything new is naive. There are whale fossils on miuntaintops.

Besides, try telling 2.4 billion Indians and Chinese that they can't inflate their own currency.

Scientists do not agree on what the root causes are, and both sides are now so dug in and full of venom that the truth certainly lies somewhere in between.

I just find it strange that anyone can presume to know what drives economic change, when all this has been going on for so long. The economy will survive us - it's hubris to think we can destroy it. Arizona was lush and green once. Evey try stimulus on Mars? No yield curve there, I assure you.

All this alarmism profits only the scaremongers, with their books and websites.

3   smaulgld   2014 May 25, 4:27am  

Iosef V HydroCabron says

This whole panic is foolish: financial edifices, currencies, and societies are always changing. The idea that this is anything new is naive. There are whale fossils on miuntaintops.

Besides, try telling 2.4 billion Indians and Chinese that they can't inflate their own currency.

Scientists do not agree on what the root causes are, and both sides are now so dug in and full of venom that tje truth certainly lies somewhere in between.

I just find it strange that anyone can presume to know what drives economic change, when akl this has been going on for so long. The economy will survive us - it's hubrisnto think we can destroy it.

All true, basically best to deny it all! Nothing can be done

4   B.A.C.A.H.   2014 May 25, 5:00am  

Iosef V HydroCabron says

try telling 2.4 billion Indians and Chinese that they can't inflate their own currency.

That's right!
It's a race to the bottom that we can win.
The worst that will come of us doubling down on this race, is higher petrol costs, which will have some good consequences like Americans learning how to share again by carpooling like in times past, more jobs for Americans in the domestic energy industry, etc.
Some hipsters may have their international travel plans made more expensive, bless their hearts! If they cannot afford the depreciated exchange rates then they oughta spend their cool and hip travel money here in the U.S.!

5   Strategist   2014 May 25, 5:07am  

smaulgld says

What happens when the Fed and China stop buying and Belgium can't cover the shortfall?

There will always be a market for American Treasury Bonds. The dollar is the most trusted currency. So relax, don't worry our country and our economy is in good hands.
Nobody does it better.

6   B.A.C.A.H.   2014 May 25, 5:09am  

Always? Nobody does it better?

When we reach the peak of arrogance, there's only one direction to go.

7   smaulgld   2014 May 25, 5:11am  

Strategist says

There will always be a market for American Treasury Bonds. The dollar is the most trusted currency. So relax, don't worry our country and our economy is in good hands.

Nobody does it better.

Explain then why the Fed now purchases up to 90% of the newly issued treasuries? Where are the other buyers? China and Russia no longer buy them. Are we to count on Belgium to spend its entire GDP on US T bonds?

8   JH   2014 May 25, 5:15am  

Iosef V HydroCabron says

Scientists do not agree on what the root causes are, and both sides are now so dug in and full of venom that the truth certainly lies somewhere in between.

You mean politicians. There are not really 2 sides of scientists.

9   Strategist   2014 May 25, 6:17am  

smaulgld says

Strategist says

There will always be a market for American Treasury Bonds. The dollar is the most trusted currency. So relax, don't worry our country and our economy is in good hands.

Nobody does it better.

Explain then why the Fed now purchases up to 90% of the newly issued treasuries? Where are the other buyers? China and Russia no longer buy them. Are we to count on Belgium to spend its entire GDP on US T bonds?

They don't have $4 trillion to lend. No one does. It's really that simple.
China and Japan each have $1 trillion + to lend and they have already done so.

10   smaulgld   2014 May 25, 6:21am  

Strategist says

They don't have $4 trillion to lend. No one does. It's really that simple.

China and Japan each have $1 trillion + to lend and they have already done so.

Correct but the United States has an ONGOING need to borrow money to fund our deficit spending -who will lend it and at what interest rate?

11   indigenous   2014 May 25, 7:03am  

Besides the money supply of what 10 trillion we have a credit market of 60 trillion. As credit grows it would assuage the need for money supply.

The treasuries being purchased by other countries are being purchased with their own inflated currency. The world is inflating their currency.

If the FED tapers QE the interest rate will rise, the debt service will become a large portion of the budget. If it doesn't taper we may have run away inflation.

I suppose the FED wants to continue to rearrange the deck chairs on the Titanic and hope debt gets paid by inflation.

The problem is the country is getting old and old people don't buy much. This will be the determining factor of when the Titanic goes under at about 2030 when the last of the boomers will be 65.

At this point the FED won't be able to do anything and the market will clear willy nilly.

Perception is reality. Money requires confidence in that money.
I wonder if the dollar will be used for currency at that point?

Another factor is that energy will be cheap and the dollar has been debased such that the US will be more competitive in the world market. In other words the trade deficit will change direction.

12   smaulgld   2014 May 25, 7:17am  

B.A.C.A.H. says

The worst that will come of us doubling down on this race, is higher petrol costs, which will have some good consequences like Americans learning how to share again by carpooling like in times past, more jobs for Americans in the domestic energy industry, etc.

That is my conclusion as well. If demand for the dollar drops, imports will become more expensive

13   indigenous   2014 May 25, 7:26am  

smaulgld says

the domestic energy industry, etc.

That is my conclusion as well. If demand for the dollar drops, imports will become more expensive

That is going to happen no matter what as the Chinese revalue the Yuan.

14   Strategist   2014 May 25, 7:29am  

smaulgld says

Strategist says

They don't have $4 trillion to lend. No one does. It's really that simple.

China and Japan each have $1 trillion + to lend and they have already done so.

Correct but the United States has an ONGOING need to borrow money to fund our deficit spending -who will lend it and at what interest rate?

Uncle Sam has a debt load of $17 trillion. The usual suspects will keep buying. Any shortage will be made up by the Federal Reserve printing press.

http://www.factcheck.org/2013/11/who-holds-our-debt/

15   Strategist   2014 May 25, 7:32am  

indigenous says

The treasuries being purchased by other countries are being purchased with their own inflated currency. The world is inflating their currency.

They buy American treasuries with American dollars through trade surpluses and foreign exchange reserves.

16   smaulgld   2014 May 25, 7:36am  

indigenous says

smaulgld says

the domestic energy industry, etc.

That is my conclusion as well. If demand for the dollar drops, imports will become more expensive

That is going to happen no matter what as the Chinese revalue the Yuan.

correct and the impact will be multiplied as the dollar falls and the Yuan strengthens- although China may not have to do anything to revalue the Yuan

17   smaulgld   2014 May 25, 7:38am  

Strategist says

Uncle Sam has a debt load of $17 trillion. The usual suspects will keep buying. Any shortage will be made up by the Federal Reserve printing press.

http://www.factcheck.org/2013/11/who-holds-our-debt/

Maybe you haven't been paying attention: the Fed HAS been picking up the shortage as they currently buy up to 90% of the newly issued T bonds.
Now the Fed is saying they are no longer going to buy T bonds- who then will?
So far "Belgium has doubled their purchases in four months.

18   Strategist   2014 May 25, 7:46am  

smaulgld says

Now the Fed is saying they are no longer going to buy T bonds- who then will?

No one.
They only time the Feds will stop buying is when it is no longer necessary to buy T-bonds.
Also indicates interest rates are likely to rise.

19   smaulgld   2014 May 25, 7:49am  

Strategist says

No one.

They only time the Feds will stop buying is when it is no longer necessary to buy T-bonds.

Also indicates interest rates are likely to rise.

Correct and a quick look at the market with China and Russia no longer buying, it would seem they need to keep buying!
Some how they have managed to taper their purchases because "Belgium" has bought 200 billion in four months!

20   Strategist   2014 May 25, 7:55am  

smaulgld says

Strategist says

No one.

They only time the Feds will stop buying is when it is no longer necessary to buy T-bonds.

Also indicates interest rates are likely to rise.

Correct and a quick look at the market with China and Russia no longer buying, it would seem they need to keep buying!

Some how they have managed to taper their purchases because "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.

21   smaulgld   2014 May 25, 7:58am  

Strategist says

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.

23   JH   2014 May 25, 9:29am  

Strategist says

Uncle Sam has a debt load of $17 trillion. The usual suspects will keep buying. Any shortage will be made up by the Federal Reserve printing press.

Every ponzi scheme has a greater fool.

24   Bubbabeefcake   2014 May 25, 9:30am  

The fed doesn't want to become the bond market. What it wants is people to buy those bonds but they require interest income. If they do another QE it'll last for a year and to unwind it it'll take another year. So it'll be 2017 when they fully stop and that is way past 2015.

Companies and pension funds that rely on long term assets like bonds will show losses. Pensions will try to increase their fees to hide it and companies will either use their sales or go into more stocks.

The problem is that they have a tolerance of risk. Pension funds know that many of their retirees do not want a lot of risk. That is why someone can choose from low risk to high risk on a retirement account.

So after 6 years of a low rate environment, stocks don't provide the return they need and they can't go all into stocks so the losses accumulate and when rates rise, the damage will stay for at least 10 years.

But if they wait after 2015, then the actuaries will have to tell the pension system they can't keep promises so remember actuaries operate on a 6 year cycle where they give pensions that long to formulate their promises. So if they miss and make mistakes, they have 6 years to make it up. That is why pensions don't behave like stocks where as when stocks fall, it doesn't reflect into the pension immediately unless it went down like 2008.

So after 2015, Fed Reserve knows pensions will have to admit the damage Bernanke caused and will retirees just accept that?

Now if they ignore this and restart QE, then we are fully Japan!

Now because Janet Yellen is very mysterious in her guidelines of QE and for her to restart will make her more mysterious opposing Bernanke at first having guidelines and becoming less and less clear as seen to his last QE and if they do another QE, they'll be like the Bank of Japan and will they just pump without a clear reason, where their own policies trap themselves.

Instead history has shown bankers have the final say and actually favor deflation when the schemes get out of control. The Fed has allowed things to fail in the previous depression and I believe they'll quit and go dormant to restart their scam later on. This way they don't become trapped by their policies and have their member banks buy things at pennies on the dollar and also reduce competition.

The Bank of Japan was never international and basically serves to protect the Japanese economy. The fed is international and its main interest is the dollar being the world reserve currency.

Bonds is the Fed's main vehicle to have the dollar as the main method thus the bank of Japan gets trapped because their interests isn't people holding their money, because it's mainly Japanese citizens that do. It's politically been captured for decades. The Fed was never politically captured and just serves the government as a customer rather than as a master.

So with history it stands to reason that the fed will pull the plug....the circle jerk is FINISHED!

25   smaulgld   2014 May 25, 9:57am  

Bubbabear says

Now if they ignore this and restart QE, then we are fully Japan!

there is no other way

26   Strategist   2014 May 25, 10:20am  

smaulgld says

Strategist says

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?

27   smaulgld   2014 May 25, 10:31am  

Strategist says

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

28   Strategist   2014 May 25, 10:37am  

smaulgld says

Strategist says

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.

29   smaulgld   2014 May 26, 2:16am  

APOCALYPSEFUCKisShostikovitch says

Yams.

Long yams.

Yam prices are rising

30   smaulgld   2014 May 26, 2:17am  

Strategist says

smaulgld says

Strategist says

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

31   Bubbabeefcake   2014 May 26, 2:45am  

smaulgld says

Strategist says

smaulgld says

Strategist says

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.

32   indigenous   2014 May 26, 2:49am  

Bubbabear says

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

33   Strategist   2014 May 26, 3:17am  

indigenous says

Bubbabear says

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.

34   smaulgld   2014 May 26, 3:21am  

Strategist says

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

35   indigenous   2014 May 26, 3:22am  

Strategist says

The country just hits an all time high in the S&P 500, and you guys think the country is collapsing.

Smell the coffee!

36   Strategist   2014 May 26, 3:25am  

smaulgld says

Strategist says

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.

37   smaulgld   2014 May 26, 3:38am  

Strategist says

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!

38   Bubbabeefcake   2014 May 26, 3:43am  

Strategist says

smaulgld says

Strategist says

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!

39   smaulgld   2014 May 26, 3:48am  

bgamall4 says

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

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