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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Bob's picture

The Great Depression is a poor comparison since the US dollar was backed by gold and the US was not the world's only superpower and the dollar was not the reserve currency.  This limited the options the US had.

Great understatement there.  Yet people like to ignore the modern system's complexity and multiplicity of leverage points.  This ponzi could run for quite a long time . . . infinitely, in theory (though not to be expected in an imperfect world, even one run by the best and brightest gangsters yet.) 

ATG's picture

That would make usury the number one budget item...

Anonymous's picture

Problem with step 4: it's trillions, not billions, of $ of debt that they need to issue.

ATG's picture

Except 30 year bond rates and oil rising from

2.519% and 35.13 after government lost all moral

compass and authority.

Fact is, most Treasury debt has to be rolled over

at higher rates in the coming year. Uncle borrowed

short and faces $106 T in unfunded liabilities.

It may be every robo trader for herself before too

long, as it was in the American Revolution.

The return of self-reliance as the market game folds...




AnonymousMonetarist's picture

Truth that...until they are gangbangin' a string.

trav777's picture

yeah if you mean float it in short maturity bills.

Look at the distribution curve for amount versus duration on will scare you.

We are a bad auction away from true monetization needs.

without the support of China's export ponzi and oil (we're consuming less and Peak has passed), there is less for the gov't needs for recycle.

phaesed's picture

Welcome to the Hicksian IS-LM liquidity "trap" (although this trap was intended from the start). Treasuries are the trade nobody wanted and it's the trade that's about to blow apart hedges with the mamajama of short covering rallies in the TLT.

When you "sell" (or short) a treasury, for all intensive purposes, you're promising to deliver cash in a certain time frame.

That's pretty hard to do with a shortage of dollars.

*yawn* The bubble in treasuries, lol, the bubble was out of Treasuries. I'm sure I'll hear all year long about shorting treasuries again next year.  Gotta love when you can marry technical analysis to economic theorizing.


Reductio ad Absurdum's picture

Nice eggcorn there. Correct phrase is "for all intents and purposes" (see

Anonymous's picture

I once told a wave, "Gee, you're swell"

P Kennedy's picture

I'm only having trouble with two parts of the logic here: 1) does the net deficit equal net supply of dollars, or does the level of imports represent the actual supply( and of course, to whom) and 2) assuming a shortage, how is anyone going to get enough dollars should the Chinese want even partially out of their dollar based assets?

What is the sound of one hand clapping?

P Kennedy's picture

Argh, I gapped! I neglected to get ask the over /under on QE2. June?

AnonymousMonetarist's picture

The sound of one HAND hamping.

deadhead's picture

probably earlier than June. 

in fact, with our polling data going south as it is, probably february.


Jesse's picture


Is that William Hung wearing glasses?

deadhead's picture

From B'berg:

"Dec. 18 (Bloomberg) -- Chinese banks’ capital strength is likely to be more “strained” than it appears as lenders increasingly use off-balance sheet transactions to free up room for further loan growth, Fitch Ratings said.

The growing amount of unreported loan transactions, including re-packaging loans into wealth management products to sell to investors and the outright sale of loans to other financial institutions, represent a “growing pool of hidden credit risk” and may lead to downward revisions for some China banks in 2010 and 2011, Fitch said in its latest report. "

The Chinese learned well from Lehman, Bear, Goldman and JPM I see.  Start stuffing their shit into QSPE/SIV death holes and unload them to investors (beware pig farmers, talk to those villagers in Norway) and other banks.

What could go wrong?

MsCreant's picture


Went on a rant. I have been trying to articulate something for a while, and I may not have said it well, but this is a start. Your news story put it up in my face.

We are all Ponzi schemers now. I think this should be the starting position of everyone's theorizing about global economic systems. Exploit everyone's faith in the system to use fiat to grab as much stuff as possible before the rest catch on. Right now some folks are catching on and instead of crying foul, they are joining in the grabbing, knowing there is still a little time to get away with it.

I keep wondering if inflation/deflation is a artifical dichotomy that has us trapped in the way we are thinking about this. In a sense, what we call hyperinflation really isn't inflation at all, it is a "fail." The work you put in to get the fiat, the value is not held by the fiat because people don't believe in the system backing the fiat. Printing is an attempt to get something for nothing.

If the currency is being debased, is there a way to look at it that "assets" things that are also supposed to represent "stored labor" are not being deflated so much as they too are being "debased?"

I am open to it that my thinking is fucked up, but I'm going to keep typing. We print too many dollars. We build too many houses and skyscrapers. We are creating too many cars (one theory would have it we should not need a new one every few years, they can be built to last many, many, years).

Granted, work went into the building of these things. But basic Marxian thinking informs us that just because a thing is created does not necessarily make it a commodity. To be a commodity it has to have both a use value and an exchange value.

Now I am going to add in the kicker-- oil/fossil fuels. It has multiplied or if you like "artificially inflated" the store of value. If all of us had to build a house without fossil fuel, the "work" stored in that house would be huge. Many of us working many hours. Fossil fuel removes the work hours. Do you see what I mean by "debasement?" Are they being exchanged as if the real people hours were in them? Or the inflated fossil fuel "work hours?" Fossil fuel distorts getting a read on the real use value of the commodity in this situation, it seems to me.

Maybe what I should say is that it seems to me that fossil fuel is some kind of an equivalent of a printing press gone mad. Fossil fuel has created all the imbalance we see around us. Fossil fuel has "debased" the intrinsic value of a house and other things we think of as stored value.

Anonymous's picture

"Granted, work went into the building of these things. But basic Marxian thinking informs us that just because a thing is created does not necessarily make it a commodity. To be a commodity it has to have both a use value and an exchange value."

This is the primary reason why Gold is strictly a speculative play at this time. It has no functional value.

faustian bargain's picture

No, that is the reason why gold is considered a type of currency, not a simple commodity.

Although if one felt the need to consider it a commodity, you could say that its 'function' is to store value or purchasing power. That is how it is primarily used, and it works well.

Hephasteus's picture

GOLD CAN NOT. WILL NOT. EVER BE A COMMODITY. It fails the basic principles of a commodity. It's NOT CONSUMABLE. It's so "NOBLE" in the periodic table that anything you can mix it with you can soo freaking easily unmix it and refine it that it's nearly ludicrous. The banks trying to pretend it's a commodity is an agregious violation of all the natural categorization laws of the human psyche.

Bob's picture

+10.  Nothing more than bloodily ancient bling that, if people call bullshit, is worth relatively little. 

trav777's picture

gold requires work to mine.

it has value in that you can trade it for pussy

Anonymous's picture

ah, that ultimate epitome of any value trading system : "can i trade it for pussy?". Touché

Rainman's picture

Trade with diamonds. Hoard the gold.

ATG's picture

Only government monopoly capitalists can take

things with 100 or 1000 years of supply and

make prices go up by inventing global warming

(domestic nat gas and coal.)

Ponzi schemers play musical chairs at their

risk. For Uncle, BB, CR, LS, Timmay and Pelosi

Reid Rahm-BH0, the music has stopped...

cougar_w's picture

You are getting close.

Fossil fuel can be thought of as two different things, and how you project it effects how it changes things:

1) Fossil fuel is free sunlight.

2) Fossil fuel is free (slave) labor.

Re #1: If it is free sunlight then you just increased all the things the sun can do for you, including how many days you can fit into a single year, and how much food you can grow in a square foot of soil. You probably quadrupled both of these. Electric lighting, space heating, fertilizers for food production, pumping water. These are all proxies for the usual activity of the sun. The "fossil sunlight" contained in coal, oil and natural gas give us more daylight, warmer conditions, and move water for us.

RE #2: You can convert the energy in fossil fuels into work (as defined in classical physics) and that work can amplify human productivity. You can also amplify your personal productivity by holding slaves, and this remains popular around the world, but you CANNOT increase total human productivity by holding select humans captive. No, you need something not human to bring to bear. We used not-human animals in the past, but they only produce limited gains in total productivity and since they are living things technically are part of our productivity pool from the start (ie we have to feed them from their own surplus production). However fossil fuels used in conjunction with engines that turn their contained energy into useful motion (and the work implied therein) are an ENTIRELY EXTERNAL SLAVE POOL that raises total absolute human productivity; engines of all kinds are every one's willing slave.

Without fossil fuels our days are fewer and shorter. Without fossil fuels our labor pool is vastly (by orders of magnitude) reduced due to the loss of all those engines. These are different effects and will show up in the economy in different places, but they are complimentary.

It has been said that the last 200 years of economic growth were simply the conversion of free sunlight into money. We can see how that might happen. But when those extra days in the year are withdrawn, and those slave workers fall still and silent, where will our wealth come from? Where will it go?

BTW, we can create extra/longer days via alternative power, collecting sunlight and wind energy during the day then using it at night or using it during the day to amplify human effort. But the utility of alternative power even on a massive scale remain minuscule next to fossil fuels. Do not underestimate the power contained in a single barrel of oil. It is simply off the charts. We would probably need to consume all our remaining oil and a lot of the coal to just create a large enough alternative power base to maintain current energy consumption patterns, and this is not going to happen. This is one of the reasons that the peak-oil and AGW movements are freaking out; we've probably missed the boat.


Sun Tsu's picture


Western technology and protective alliances with the Middle East powers have enabled a quantum leap in prosperity since the 1950s. Paul Ehrlich had graciously predicted a Malthusian apocalypse in the 1970s, in spite of the obvious, the human species have adapted with increased productivity and the real economy thrived. No world wars, increasing global cooperation, banking, entrepreneurs leading technology innovation in every field, the green agricultural revolution, and a continuous stream of more energy supply and more efficient use made practical. GDP growth is highly correlated with the growth in steady and fair-valued energy use, and not with artifically contrived climate models. Private enterprise spent 50 years preparing for Peak-oil before Paul Ehrlich and Al Gore adopted peak-oil for use as a political lever.

Leave it to the Goldmanites, movie stars, President Obama's Administration, and the 2008-2010 elections to rush a climate treaty "potlatch", and screw the pooch....  May they all live in interesting times.

Anonymous's picture

Well every now and then China finds someone to face the executioner. But keeping two sets of books is a great way to do business, just ask any fraudster out there.

Anonymous's picture

I've been harping on that for a while and would have taken a long position with the ole buck,if it wasn't for the fed. The account deficit has shrunk by almost 50%,so there is no need for the dollar to be at 2008 level. But now with the chairman passing the first test in the house,who knows whatt kind of scheme he is going to come up with GS and company to drive the dollar down again?

ATG's picture

Do not fear the Fed.

It cannot push on a string.

And GS has net its waterlooo.

Only fools want more debt...

Sancho Panza's picture

Excellent post.

From Mises' The Causes of the Economic Crisis, "By acting in unison, banks [among nations] could extend more circulation credit than they do now, without any fear that the consequences would lead to a situation which produces an external drain of funds form the money market.  To be sure, if this concern with the situation [threat] from abroad is eliminated, the banks are still not always in a position to reduce the money rate of interest below its "natural" rate in the long run.  However, the difference between the two interest rates can be maintained longer, so that the inevitable result - malinvestment of capital - appears on a larger scale.  This must then intensify the unavoidable crisis and deepen the depression."

Looks like we're headed for a global depression.

ATG's picture

We have 2.2 T dollars and what's left of a $13 T

GDP. Where's purchasing price parity?

Well north of 121 methinks. Now the giant

sucking sound working FOR the USA after

decades of New World Order scaffolding

collapses. Pity the architects...


Anonymous's picture it is....

Time to downsize the US govt by 30% to 50%....

This is a force majure....

Cannot lose....

What one does not have....

Anton LaVey's picture

It's spelled "force majeure".

Good luck downsizing the US gov.

ATG's picture

Tax revenues fell -35% last April 15.

The Beast is starving and the Fed and Treasury

know they cannot finesse its way out.

Looking for cascading government defaults from

county to state to Fed to UN level...

MikeNYC's picture

Oh, I know: We just print up some dollars and give them some, which they use to buy our Treasuries.

This central banking stuff ain't so hard.


Daedal's picture

Obviously you've never printed dollars with one hand while shaving your beard with laser-like precision with the other. Not so easy now, is it?! And by 'printing dollars' I of course mean giving a reach around to Ken Lewis.

i.knoknot's picture

and what if we 'give' them dollars via backdoor market information, e.g. we'll "let" gold rise until date_1, you sell, we'll let it drop for a buy-back date_2, you buy... no receipts, no tracking, just happy gub-mints/central banks...

not that far out if you think about the agendas and levers that are out there...

based on ZH reading, we can move the markets any way we want for short periods of time... changes your sense of the game a bit if you look at it that way.

MsCreant's picture

I have wondered this myself. I could even see doing the backdoor information thing as a way to cool them out after you have ripped them off "Let us make it up to you by doing X untill XX/XX/09, then we will do Y, to save our own ass, but you pull out before we do Y so you won't get hurt the next time we go to rip everyone off."

cougar_w's picture

What if?

It's pretty clear they've been doing exactly that for a while. What is probably happening now is, the greedy are taking their spoils and letting the "beautiful machine" fall apart.

dark pools of soros's picture

hell the Fed is probably the worlds biggest counterfeiter of the $$

Anonymous's picture

So now do you still believe the billions of US Treasuries confiscated by Italian police from Japanese at the Swiss border (twice) were counterfeit?

Anonymous's picture

If the Treasury (deficit) spends for real goods and services or salaries, new reserve balances are created.


Either way the bonds get sold! Guaranteed! It's not economics it is simple accounting.

ATG's picture

What reserves?

Defaults far exceed money creation and TARP as

Rosie, Meredith Whitney et al pointed out...

fiasco's picture

when the jobs went overseas to the barbaric world, the economists say the new paradigm is the platform economy.

we invent and the barbarians make the stuff with lead and poison.

platform economy, nasdaq at 5000, strong dollar policy, and what else?

when you look at the past, you say to yourself how somebody can believe such stupid things, like god, like the soul, like resurrection, like intelligent design, and like the ending to the sopranos.

but now it's like the stupid past is here happening before our eyes.

i'm a gonna take my ashes to the mountain after i bang francesca down the street.




lsbumblebee's picture

You read Henry Miller don't you?

fiasco's picture


the last book i read was when i was a bambino.  it was dostoyevsky idiot.

i had this experience,  i was reading the book when the neighborhood boys come along and saya

hey, look the idiot read the idiot.

this had an affect because reading is actually something stupido like playing cards is stupido for schopenhauer

now i just read the internet



lsbumblebee's picture

Well at least you're reading something. Mosta people lika you...shit you got me doin it. Most people just watch teevee.