The Dark Gray Swan: No More Foreign Dollars With Which To Buy US Treasuries

Tyler Durden's picture

Could the next black/green/dark gray swan be so obvious that it has avoided everyone? Well, except for the deputy governor of the Bank of China, who just gave the world a startling reminder of economics 101, when he said that it is "getting harder for governments to buy United States Treasuries because
the US's shrinking current-account gap is reducing the supply of dollars
" Oops.

The funny thing about natural (and economic) systems: they can only be pushed so far before they snap back to default state. With the entire world embarking on an unprecedented spree of domestic bubble blowing to mask the collapse in global GDP, everyone forgot to trade. Zero Hedge has long emphasized that the drop in world trade can only sustain for so long before it brings the current destabilized system back to some form of equilibrium. Because with every country intent on merely printing more of its own currency, whether it is to build bridges or to make the stock of electronic book fads trade at 100x earnings, said countries ran out of non-domestic cash. Alas, this is most critical for the United States, now that Treasury monetization is over, as the US needs to constantly find foreign buyers of its debt to fund unsustainable deficits. Foreign buyers who have US dollars. And according to Shanghai Daily, this could be a big, big problem.

Here is what the BOC's Zhu Min said earlier:

"The United States cannot force foreign governments to increase their
holdings of Treasuries
," Zhu said, according to an audio recording of
his remarks. "Double the holdings? It is definitely impossible."

US current account deficit is falling as residents' savings increase,
so its trade turnover is falling, which means the US is supplying fewer
dollars to the rest of the world," he added. "The world does not have
so much money to buy more US Treasuries

In a nutshell, in printing trillions of assorted securities, the Treasury has soaked up the world's dollars, which due to US banks not lending, is sitting and collecting dust in the form of bank excess reserves. These excess reserves can not be used to buy Treasuries and MBS as that would be literal monetization (as opposed to the figurative one which is what QE has been). And the world is running out of dollars with which to buy Treasuries.

Does this mean that the "world" will be forced to buy dollars, and thus spike the value of the greenback? Not necessarily:

In a discussion on the global role of the dollar, Zhu told an academic
audience that it was inevitable that the dollar would continue to fall
in value because Washington continued to issue more Treasuries to
finance its deficit spending.

A different read of Zhu's statement is that the US should no longer rely on China for funding its bottomless deficits. And if that is the case, things are about to get much worse as the Fed has no choice but to turn the monetization machine on turbo.


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johngaltfla's picture

And PIMCO has raised its cash holdings to the highest levels since Lehman imploded.

This is going to end poorly in Q1. The question is which banks blow their derivatives chunks on to the markets first and the question never answered by the Whiz Kids is what happens when you get 3 standard deviation moves in 10 & 30 year Treasury yields within an extremely short time period and who is going to cover the losses?

Anonymous's picture

The Panic Over the Soaring Monetary Base Was a Bernanke Bluff
This is big. It is going to knock for a big loop all those concerned about the inflationary consequences of the soaring monetary base. The Federal Reserve Bank of New York today released a report, "Why Are Banks Holding So Many Excess Reserves?".

Fed economists Todd Keister and James McAndrews state that while the high level of reserves in the U.S. banking system during the financial crisis reflects the large scale of the Federal Reserve’s policy initiatives, it conveys no information about the effect of these initiatives on bank lending or on the level of economic activity. This is another way of saying what I have been saying right along, watch the money supply, not the monetary base.

Keister and McAndrews explain that the buildup of reserves in the banking system is a by-product of the liquidity facilities and other credit programs introduced by the Federal Reserve in response to the crisis. They also discuss the importance of paying interest on reserves when the level of excess reserves is unusually high. But the key point they make remains that the majority of the newly created reserves end up being held as excess reserves and, therefore, the data on excess reserves provide no useful insight into the lending decisions and other activities of banks. Got that? The trillion dollars sitting as excess reserves has had no impact on the economy, and as the Fed stops it's emergency facilities, it is going to be drained. The trillion never went into the economy and never will.

If Keister and McAndrews are correct, and I believe they are, then the Fed will have little problem in ending its emergency lending facility activities. The banks by maintaining those funds as excess reserves (for whatever reason, even if it is simply to earn interest) have in reality kept those funds out of the economic system. As the Fed ends its liquidity emergency facilities they will have to pay back the borrowed funds.

The alarmists, who have thus pointed to the surge in the monetary base as a sign of soaring Fed monetary "easing" and who have been shouting about the inflationary consequences, are going to go into cardiac arrest once they see the monetary base crash when the Fed winds down its emergency facilities and the banks use the excess reserves to pay back the facility funds. The super-decline in the monetary base, as was the super-increase in the monetary base, will of course mean nothing relative to the actual money supply, which is where one should have been keeping one's eyes all along.

In a way Bernanke played a huge shell game on the global financial world. All the so called easing never happened. Let me repeat, what was touted by almost every economist in the world as the extremely loose monetary policy, didn't happen. The money never entered the system. It was a bluff. Bernanke has set us up for Crash II and few see it coming. I wouldn't want to play poker against him.

Read the full Fed report here

UPDATE: I want to emphasise that the purpose of this post is to show that looking at the monetary base instead of the actual money supply was an error and that as the report says the reserves that were simply excess reserves had no impact on the economy. However, the Fed report does to some degree imply that the trillion in excess reserves is with one set of banks and the extra credit facility money is with another set of banks. I do not believe this is the case, or Bernanke better hope it is not the case as he stops the emergency credit facilities. I will have more on this tomorrow in Part 2.

RobotTrader's picture


Looks like they were buying en masse today....

TIME 3-Month 0.000 03/18/2010 0.04
0.002 / .002 21:21 6-Month 0.000 06/17/2010 0.15
-0.012 / -.012 21:00 12-Month 0.000 12/16/2010 0.33
-0.04 / -.041 21:00 2-Year 0.750 11/30/2011 99-30+
0-03½ / -.057 21:20 3-Year 1.125 12/15/2012 99-16+
0-07½ / -.080 21:17 5-Year 2.125 11/30/2014 99-16½
0-15½ / -.104 21:17 7-Year 2.750 11/30/2016 98-20½
0-21½ / -.109 21:18 10-Year 3.375 11/15/2019 99-04½
0-31½ / -.120 21:18 30-Year 4.375 11/15/2039 99-09+
1-24 / -.108 21:00


Anonymous's picture

LMAO...Robot's a trip...but you knew that.

SloSquez's picture

LMAO - Robo's a trip...but you knew that.  Thanks!!!

Smu the Wonderhorse's picture

So if it's not China, who is buying this stuff?  The primary dealers who then offload them to the Fed?  Is that it?  If not, who?  Tisn't me.

Pedro's picture

I guess if primary dealers buy them, then the fed buys them from the dealers, that would mean that ultimately the printing press is buying them which then would mean we taxpayors are buying them because the printing press will buy so much time before a financial crisis begins. 

So, Tis you (and me).

Pondmaster's picture

I understood that the "primary dealers" were short on cash , which is why uncle shill is turning MM fund reverse repos( though they deny all but "experimental tests". ) Low on cash , no buying the endless stream of worthless U.S. debt   . Who is buying , besides the tis's 

bonddude's picture

Q "Why do you rob money market funds?"

A "Cuz that's where the $ is"

Hephasteus's picture

I was surprised they turned off the buck breaking action so fast last crash. Me thinks this next one they won't be able to.

lsbumblebee's picture

Tell me again how this is deflationary.

docj's picture

My totally uneducated wild-ass guess: it's delfationary short (perhaps very short) term as dollars dry-up, the excess sitting as reserves that can't be released lest C, JPM, WFC no longer be able to fake solvency, and consumer/sheeple continue to buck TPTB and either save their cash, convert to assets, or pay-down debt - all of which takes more dollars out of the system and is also deflationary.

Once Barry/Timmay/Ben have no choice but to monetize, that snaps through equilibruim from deflation to inflation, probably parabolic, very quickly (especially given our baseline debt and current account deficit levels, both of which will only get worse).

Again though, that's just a totally uneducated guess.

This much I'm not guessing about though: it ends poorly, for all of us.

lsbumblebee's picture

No argument here. I'm addressing those that believe we face deflation in the long run.

Anonymous's picture

Deflation is the midwife of hyperinflation.

lsbumblebee's picture

No argument here. I'm addressing those that believe we face deflation in the long run.

Rick Blaine's picture

Who have you heard who thinks that we are facing deflation in the long run?

I've heard quite a few arguing for it in the short run...but they all seem to think eventually the tide will shift.

cougar_w's picture

Roubini is basing his US medium-term deflation call on reduced incomes and increased savings. Households have no money. No money, no buying. No buying, no upwards price pressure, widespread BK in retail and resulting impact on household incomes. Rinse & repeat. Everything falls inwards a little more with each turn around the wheel. That's why it's called a "death spiral".

It isn't always about abstractions, ya know. Households are being eaten alive.


AnonymousMonetarist's picture

There is no such thing as deflation in the long run.

Deflation with sound money corrects itself.

Deflation in fiat can only end one way ... folks here seem to have all gotten that memo ... if y'all are unsure perhaps this will set the mood music ...

Cursive's picture

People often make the mistake of talking about printing presses.  That is powerful imagery, but it is wrong.  Much of the QE is done to offset the contracting credit.  If you include credit in your money supply calculations, you will see that we are in a deflationary period.  Japan has been doing this for over 20 years.  Not saying that the Japanese scenario is exactly what we'll face, but it and our own Great Depression are emprical examples of prolonged deflationary periods.

lsbumblebee's picture

I don't understand how debasing our currency, any currency, is deflationary.

Anonymous's picture

The currency that is being debased is only a small portion of the total "money" in circulation. The bulk of the "money" in use is credit, and the amount of outstanding credit is shrinking faster than currency debasement can keep up with.

It's worth noting that it is also doing this massive shrinkage at a time when banks are loathe to actually recognize much of the shrinkage by actually dealing with loan defaults. Extend and pretend is their attempt to prevent the deflation from hammering their loan portfolio... It's gonna fail, but that'll continue to take a while.

Cindy_Dies_In_The_End's picture

Shrinkage..makes me think of George from Seinfeld.heheheh

Art Vandelay's picture


Orly's picture

Exactly the right concept.  It is all about credit and the velocity of money (i.e., "credit expansion"...), which hit the wall in 2007 and is falling precipitously toward the floor as we speak.

Deflation in this scenario is inevitable.  The plan is to have a load of cash on hand for the bottom and turn around and buy every three-bedroom home in my neighborhood that I can get my hands on.

Fancy-free income for life.

Anonymous's picture

And then pay the PROPERTY TAXES on each of them as bankrupt municipalities crank up the tax revenue.

I remember, prior to the 70's, everyone owned their car. They went to an auto dealership and got a loan (either through their bank or the dealership), and they owned the car after 3 to 5 years.

Then after the 70's, into the 80's, all of a sudden nobody could afford to buy a car anymore, and they never did again -- even through the ''roaring 90's'' -- and now I can clearly see what's coming with Real Estate.

Housing prices may (probably will) collapse to numbers not seen since the 80's, but the cost of PROPERTY TAX will shoot so high as to cause the actual net cost of ownership to be as high as it is now. I feel sorry for anyone who thinks property will be the route to future prosperity.

Think "ancient Rome" during it's final collapse...

Anonymous's picture


In my reference to car ownership, I was referring to buying as opposed to LEASING, which is what car ''ownership'' became after the 70's.

dnarby's picture

From my understanding...  It's an easy thing to misunderstand.

TTBOMK, you need to realize that we don't even have a fiat currency.  If we did, we'd have a set number of dollars out there, that are periodically diluted by creating more dollars.

But instead, we have *fiat debt*, because for each dollar that's created, we also create a dollar's worth of debt - And that debt needs principal and interest payments made on it.

As long as the debt grows steadily and in sync with population & production, everything is fine.  If it grows too quickly, it does a Chernobyl on your ass.

I could be wrong, and look forward to any clarifications or corrections necessary.

Anonymous's picture

Then why don't you explain it to us all Einstein? Or are you going to keep asking the question until you either run out of people to insult or get the answer we all know you've already come up with on your own?

Ripped Chunk's picture

+1  stomp on all trolls

JR's picture

Isbumblebee a troll?  Huh-uh! Isbumblebee sparked a very informative conversation, Ripped Chunk.  Very sophisticated people are on both sides of the inflation/deflation question.  You can read pros and cons everywhere.  The published economists are on both sides.  So why wouldn't it be okay for someone to ask a question about it, and be persistent?  What would worry me is someone who actually claims he knows what is going to happen, because with the government being the mysterious partner in bed with you, you don't know what to expect.  And "Fed economists" work for the Fed!

It takes an informed and confident person to ask questions: most people are afraid to ask questions because they think it will make them appear ignorant. As a consequence, we are all more ignorant. This blog is a gold mine of experts outside the run of the mill mainstream;  the more questions asked here and answered, the richer, literally, we are!!! 

harveywalbinger's picture

"... most people are afraid to ask questions because they think it will make them appear ignorant."

This statement is the verbal equivalent of a prime number. This is indeed a profound insight and one which is universally applicable.

We are vain little creatures aren't we...

+1 trillion

economicmorphine's picture

The short answer is that the amount of credit being destroyed is greater than the amount of money being created.  Until that stops, deflation.  When it stops, inflation, probably of the hyper variety because, yes, deflation is the midwife of hyperinflation....but only to those governments who are unwilling to accept it.  I'm even more fundamental than that.  I think deflation is not such a bad thing.

Ripped Chunk's picture

In moderation over a relatively short time frame.

RagnarDanneskjold's picture

The Fed isn't literally printing money. They aren't creating pieces of paper, or even 1s and 0s unbacked by assets in most cases (QE changed that). The Fed buys existing assets which the bank owns. In order to have unbacked money creation, they need to fire up the printing presses and create physical currency that will survive a default, or they need to buy straight from Fed gov. The latter seems most likely, but even now the Fed says they will stop in 2010.

Whether you agree it will happen or not, Japan just debased its currency, hard core, for 20 straight years and their nominal GDP is at about 1994 levels. That's where Roubini is coming from.

Anonymous's picture

The FED is buying toxic assets at way over any possible market value. Whatever money they spent over and above any sane valuation is indeed money not backed by assets.

trav777's picture

mostly correct.

The problem with debtmoney is that it requires someone ELSE to borrow to pay your interest.  It's very clear if you think about this that it is a ponzi scheme.

The interest that the other guy must pay on his loan represents interest upon interest.  This is an exponential compounding problem.

No money comes into existence except by lending.  It all must be paid back plus interest.

Long as there are people demanding loans to do things that produce more stuff, someone else will have to borrow money into existence to buy that stuff, but then they have to find someone else to borrow money into existence to buy their stuff to pay the interest on their loan which paid the interest on your loan of money, etc.

This is a pyramid scheme, in essence.  Once production in the aggregate peaks, the system begins to eat itself.  Money in the system starts getting needed to pay existing interest claims and the interest starts to eat the money supply.

dnarby's picture

Thanks, I agree.  I had thought I figured that in, next time I'll try and add that more clearly to my "sum up deflation in 200 words or less for idiots" essay. XD

BRAVO 7's picture



ATG's picture

None necessary.

You nailed it, exactly what inflationistas

fail to comprehend, that high gold prices

and low bond yields signify defaulting

devouring deflation sdepression not seen in

four generations. No wonder monopoly media

call it a recession that is over...

saturno_v's picture



During the Great depression we experienced a long period of deflation because we were still on the Gold standard.

After we severed that link and the FDR gold confiscation event, suddenly we had inflation.

There is nothing preventing an enough determined government in a fiat currency regime to create inflation.

In Japan the CPI actually never went negative, they suffered serious asset deflation. On top of that Japan did not print in overdrive, afterall their unemplyment rate was never over 4.5-5% (what we would consider full employment here) and calculated with a less "massaged" methodology...and their trade balance has always been positive.

We are into this crisis with a serious trade deficit and a real unemployment rate at 18%...our industrial infrastructure is shot.


ATG's picture

After the banking holiday and 69% devaluation of

the gold dollar in 1934, we had less than a year

of 7% inflation, and then nothing, because of

the negative money multiplier like we have now.

Real GDP contraction and unemployment continued

until well after WWII like now. There is no magic

in neoKeynesian free lunch. Someone always pays

the bill, usually borrowers, consumers, shareholders


and taxpayers with foreclosures, market and

social contract defaults.

Productivity creates jobs, profits and savings,

not government. Take a good look at

Shadowstats M3 growth going off a cliff since

2008. Usury ultimately causes deflationary

defaults, one reason it was proscribed by ancient

texts. Get ready for the next round of deflationary

default denials led by Credit Cards, CRE and Euros...

Truly there is little new under the sun...

dnarby's picture

I would argue that the reason we went into deflation wasn't the gold standard, but irresponsible lending.

However, your point that inflation didn't happen until after FDR stole the gold is a good one.

I would argue though that once unservicable levels of debt have been reached (per Steve Keen's ) a determined enough goverment would have to first change their money from debt based to a fixed amount in order to achieve inflation.

Anonymous's picture

We are not in deflation in the broad based sense where all prices are falling. Go to the supermarket, things are noit very much cheaper than two years ago. We are in debt deflation, which might have been a cleansing excercise, even it it would have been painful. This will be met with increasing the money supply, and it is potential future threat this that is discounted by gold. REad QBs excellent outlook for more on this subject, they explain it in great detail and with a clarity that I haven't seen many other places.

The causal chain is debt deflation -> threat of future monetary inflation -> rising gold prices. Actual present time inflation such as that measured by the CPI is not a necessary precursor of higher gold prices. It is the perception that it will come that lifts hard assets.

As such, gold is not irrrational at 1100 dollars as some people say. If the us continues to debase the dollar, gold will keep going up. Simple as that. So will they? Yes. Because we are still in debt deflation, and more stimulus is going to be introduced.

As fiscal stimulus and monetary stimulus take hold and banks start lending, the trillion dollars in excess reserves will be grown throught the reserve multiplier as banks loan, lend, loan lend etc, historically about a sevenfold multiple of the excesss reserves. Unless you think the Fed will know EXACTY when to time a monetary contraction to mop up liquidity, chances are there will be an actual inflation problem.

Interestingly, the output gap estimations of bernanke are subject to a lot of debate - he might be underestimating the effects of debt deflation. In that case, the easy money policies will stay in place even longer and gold should benefit from that too.

ATG's picture

Gold had irrational exuberance at 1226.40

and still irrational at $1100. Maybe $970.

Debt default deflation is not good for bonds,

commodities, gold, stocks or real estate.

It benefits actual physical dollars, one reason

Bill Gross has been raising cash.

Anyone who does not appreciate this may

be taken to the reaper...

dnarby's picture

True, but as currency fears rise, gold will as well.  Or rather, it won't fall as fast as other assets on the pullbacks.

barthezz's picture

QBs excellent outlook for more on this subject ----


where do I find this outlook?



AnonymousMonetarist's picture

Inflation expectations were well anchored during the Great Depression and in Japan.

docj's picture

Heh - sorry.  Forgot whom I was addressing for a minute!

Cheers -