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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AnonymousMonetarist's picture

Dollar strength lock-stepped with past swap facilities.

faustian bargain's picture

Maybe the Fed should have a go at printing foreign currencies.

Anonymous's picture

Please help. Doesn't China "peg" its currency to the dollar by printing yuan and then buying dollars, which are then used to buy treasuries? How will China maintain the peg without buying treasuries?


ATG's picture

China has been buying currencies and commodities other than the dollar.

Last gasp before the peg pogos up and their

economy keels over...

Anonymous's picture

The rmb (yuan) is a controlled currency, which means it is illegal to move any sizeable amounts beyond chinese territory. All forex transactions conducted at local banks are subject to rate and quantity controls. They do not need to print to maintain the peg, they simply arrest anyone (locals and foreigners alike) found to be violating these laws. Corporate entities will be subject to harsh penalties, up to and including revoking their operating licenses.

China's vast reserves of US dollars comes from accumulated trade surpluses. Same case with japan.

Their effectiveness in maintaining a watertight peg is laudable (many countries have tried and failed), or detestable, depending on one's allegiance.

bigdad06's picture

Oops is right! HAHAHAHAHAHA!!!! January is the month, bye bye dollar!!


ATG's picture

He who laughs last laughs best.


Anonymous's picture

Article says "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."

That is were the rising savings rate, and a rising allocation into government securities (away from Mortgage and commercial debt) of investors comes in. Just like Japan, we "can" fund the government debt ourselves.

theprofromdover's picture

Rule No. 1 for working in the far East:

.... the Chinese are inscrutable....

Rule No. 2

.... no, the Chinese are inscrutable....

Rule No.3

....are you not listening, the Chinese are inscrutable...............

Anonymous's picture

To understand the current state of affairs, you must keep in mind that consumers are not "saving," rather, they are "not borrowing." Consumers, as a whole, were already maxed out both in terms of credit limits on their cards and as a function of cash available to service the debt. All available cash flow is going to service debt. The limit has been reached and the tactic of raising the interest rate on those credit cards has the immediate effect to the banks of raising interest income, as an ever-decreasing (and now vanishly small) portion of the minimum monthy payment is devoted to principal.

Until wages increase, there can be no movement in Consumer Land. Now, add to that the considerable domestic (read spousal and issue demand) pressure on Joe Sixpack to produce some goods under the tree for Commercial Xmas and I'll concede you'll see some blood actually produced from that stone, but forget about Q1 2010 showing any signs of life from him and look for a fresh wave of defaults as x number of households sink beneath the debt load.

Same with the government. We are going to see dramatic steps to avoid failed auctions at some point; one likely form of QE/debt monetization would be "allowing" (really, forcing) banks to "go patriotic" and acquire Treasuries with their borrowed reserves, and why not? They pay more than the Fed does, but we all know if this occurs, well, buy gold or anything tangible at that point. In fact, I say we create those Ts in the form of long term "Liberty Bonds" and drape them in some sort of flag motif to complete the charade, and stifle dissent.

ATG's picture


Big banks already bought Treasuries at 2.518%

last December and are now underwater,

typical result of gambling and plunging to

get even...

I need more asshats's picture

Although I agree with your argument TD. The data does not support such an event.

The U.S. balance of payments deficit widened in the third quarter to $108 billion from $98 billion in the second quarter.
The current account deficit totaled 3.0% of gross domestic product, up from 2.8% in the second quarter, which was the smallest percentage since the first quarter of 1999.

The deficit peaked at 6.5% of GDP in the fourth quarter of 2005.

ATG's picture

The last gasp before trade slows to zero

and everyman hoards for his life...


TruthHunter's picture

From here at the bottom of the food change

All Swans looks pretty black lately.

Current account?  It's not so much current account

as Foreign holders are suddenly lowering our Credit Limit.

Current Account may all of a sudden start to matter.


Hmm... too many people act like economics is a game 

of Pin the Tail on the Donkey.  However the donkey's

alive and kicks everybody in the Ass who thinks thinks they've

got it nailed. 


TruthPoacher...(no license)


FLETCH's picture

This can be resolved in the near term with Central Bank currency swaps.  Quantitative Easing, international edition.

Problem is China doesn't want to do swaps because they know they are a ripoff for an Economy that generates EARNINGS.  (see comment above)




kane1559's picture

Debt Maturity Schedule for the US Government according to BBerg

2009 227,287
2010 2,184,648  + 2010 Projected Deficit
2011 811,192
2012 754,508
2013 411,081
2014 583,406
2015 180,723
2016 452,980
2017 161,523
2018 213,081

bugs_'s picture

Mercantilists always meet the same end.

Let us watch them meet their fate.

Chumly's picture

inflation, deflation, blah, blah, blah....

The world economy, especially the USEconomy will look like a whirling dervish on crack (inflationary-deflationary parabolic spikes) in the near future...

The third seal is's just a matter of time....

ATG's picture

So what are you buying/selling?...

tip e. canoe's picture

"A measure of wheat for a penny, and three measures of barley for a penny, and see thou hurt not the oil and the wine."

Anonymous's picture

I'm a bit confused by the US debt thing and was hoping somebody could help me out. In post 168562 "Apocalypse Now" talks about our current debt and borrowing just to service interest, with the principal being essentially unpayable. But past data shows debt to GDP was way worse sometime around WW2. Can someone put this in perspective?

I know back then the US economy actually produced stuff, whereas now it is a consumption based economy, with the consumption paid by huge consumer debt. Is there anything else I'm missing? I'm just trying to fit together the puzzle.

Anonymous's picture

I never understood this "consumption based economy" statement.

All money earned in the economy is used for consumption or investment.

GDP is a composition of all earnings in the economy and thus even money saved is spent elsewhere for investment.

The US economy does still produce stuff. In fact, we produce a great deal more than most of the world.

And you're not missing anything. It's simply that the fiscal trajectory of the US, in long run, is horrible. It is definitely still possible to reduce the debt/gdp ratio over a period of time given small, neutral, or surplus deficits so long as GDP grows sufficiently. There is no reason that it won't. No, the world isn't going to implode, as some here would have you believe. People will continue to be industrious and produce goods and services. The world will go on.

My question to the readers of ZH are, why shouldn't we increase inflationary expectations? High inflation expectations can and were expansionary in the short run during the great depression when NIRA was enacted. Consumers expected inflation and thus were forced to purchase goods. When consumers expect deflationary pressures they reel in spending and increase savings, as well as cut down on their debt because the real cost of debt is rising substantially. When interest rates are at the lower bound The only way to decrease the real interest rate is by increasing inflation.

trav777's picture

oh yeah, NO reason whatsoever to expect that GDP won't

Yeah, a GDP based upon notional values of synthetic debt instruments.

Just for my edification...what exactly does the US produce these days?  Be specific.

Anton LaVey's picture

Remember this:

- WWII ended with Europe pretty much in ruins. The USA were the only country left with industrial production intact - that really helped.

- The USA was a net exporter of oil until the 1960s. That also helped a lot.

- The USA, due to the above, was a net creditor. Other countries owed it money (for instance, the UK). That really, really helped.

Nowadays, all of the above is untrue: industrial production has been outsourced to China and other countries, the USA has to import its oil from the Gulf and it owes money to pretty much everyone, from China and Japan to Europe and all countries in-between. Which is why the US sovereign debt is such a problem today, while it was not, say, in 1950.

Just a thought.

tip e. canoe's picture

"all countries in-between"...especially those tiny islands just below US...

ATG's picture

Budget deficit debts approaching the size of GDP.

Back in WWII we had savings.

No longer.

Pity those living in the past and selling puts...

Joe Sixpack's picture

Maybe this is a backhanded attempt to create a new reserve currency: Fed starts accepting foreign currency for Treasuries. Fed fills reserves with foreign currencies. The dollar is still the world`s reserve currency, but the dollar is made up of the world`s currencies.

tip e. canoe's picture

nice call J6P, the currency swaps were a nice little beginning yes?

Apocalypse Now's picture

Yes, you may be on to something there.

Canada is roughly 1:1 with the USD and the Euro is probably soon to join 1:1.

Financial engineering 1to1.

BoeingSpaceliner797's picture

Here's a black swan for everyone:


Everybody expects that Bernanke, et al are full of it with regard to winding down/stopping QE in March (myself included).  Everywhere I look it is widely expected that we will either see official QE v2.0 or some sort of backdoor/hidden QE II (again, myself included).  What if (for one of the very few times) Bernanke and the FOMC are telling the truth and QE really is over come March.  Now THAT would be one hell of a black swan.


Coincidentally, this black swan dovetails quite nicely with PIMCO's recent paring of it's MBS exposure (with everybody expecting they will buy it back once the haircut has been imposed by QE ending).

Anonymous's picture

The U.S. current account deficit is shrinking because the domestic savings rate is rising. U.S. savers are gonna fill the hole left by declining Chinese demand for Treasuries, so I wouldn't lose sleep about this. Also, a big reason the U.S. budget deficit is so huge is because the economy is still flat on its back. If budget deficit begins shrinking, it would likely be a sign of increased business activity/tax revenues. If that's the case then I WOULD want to dump Treasuries. FWIW I don't see the latter scenario happening anytime soon...

AnonymousMonetarist's picture

We speak of a mild outcome to all this, a new normal, as we stuff the pig on the scale of fate. We are so far down the rabbit hole Alice, so arse over tit, that it is quite plausible that the power law being applied here is masquerading mild as wild as well as its' converse.

What if the mild prognostication is deflation or hyperinflation with either A cascading to B or B cascading to A?

What if the Black Swan is just, hope upon hope, muddling through?

ATG's picture

Meaning you are long or short what, exactly?

(Dollar up 10% from March 2008 lows)...

AnonymousMonetarist's picture

Q: Is it actionable?

A: Take a deep breath buttercup.

Anonymous's picture

That's a very sensible idea- accepting foreign currencies. ..unworkable, unfortunately. Central Banks would have to agree with each other almost constantly which at least would be politically sensitive.

Today, people are stating that they are not prepared to accept the dollar.

That leaves the US consumer out on a bit of a limb vis-a-vis imported goods. Since that's very clearly an 'inflationary cause': buying goods from other countries includes a premium for having them accept the dollar. Exchange rates are fluctuating so much anyway that it may or not be true/relevant/particularly matter.. uncertainty in the future in the dollar aint great for imports..except also that it is a marginal effect, since trading partners Japan and Europe are presently also basket cases.

So 'inflation' due to exchange-rates isn't primarily a problem, Foreigners' Debt uptake or lack thereof.

Inflation due to a perception that there is more money to be made by putting prices up (like if there had been a rise in aggregate wages and salaries)..also not a strong concern.

The theory states that prices should come down -in order to clear output- where it is expected that the purchasing power of the consumer has fallen. Of course, the problem is that the US is a huge country, with many suppliers. So it is just as likely that margins for suppliers were thin already and that lowering production is more rational than bringing prices down. Retailers do well from this position.

If the sales figures going from October to November were flat, to my eyes that implies retail prices adjusted demand to supply. I think Retail does use sophisticated algorithms to control inventory, which is why I think this is a more likely scenario: which implies 'inflation' between the superstore and the consumer versus 'deflation' between the superstore and the supplier.

That's entering a vicious circle. And at +10% unemployment, price controls on basic goods is going to have to be addressed. While uncertainty remains in the dollar -which, please correct me if I'm wrong, is entirely due to isolating damage caused from the Credit crisis and the monetization of that damage- the shadow of Hyper- inflation and deflation is going to stay beside anyone who uses the dollar.

Sun Tsu's picture

-the Holidays crowds not at the Mall this year.  ZH Rocks.

Anonymous's picture

What happened to the $14 trillion the banksters got to play as hedge funds? Is that all counted in this assumption. What about all the toxic assets that we the taxpayer paid for? Please tell Mr Deflation man what is deflating besides my buying power? Did your tax man call you today to tell you your real estate taxes went down? Did the university call you and say your kids college tuition is going down? Maybe it was the supermarket telling you everything is 50% off. Give me a break with this deflation crap. Please give me a list of what is deflating? None of you can and never do who profess it to be. I can give you a luandry list of things that inflating.49

JR's picture

Fed Up By Ron Paul, 05.15.09 | Forbes

The Federal Reserve's recent and unprecedented actions in the realm of monetary policy have provoked a backlash among the American people. Trillions of dollars worth of loans and guarantees have been provided to Wall Street firms, while Main Street Americans suffocate under harsh taxation, the prospect of higher debt levels and increasing inflation. These events have awakened many Americans to problems with the Fed's loose monetary policy, the bubbles it has created in the past and the potential hyperinflation it might cause in the future.

One of the fallacies of modern economics is the idea that a central bank is required in order to keep inflation low and promote economic growth. In reality, it is the central bank's monetary policy that causes inflation and depresses economic growth. Inflation is an increase in the supply of money, which in our day and age is directly caused or initiated by central banks. All other things being equal, inflation results in a rise in prices. A so-called "mild" rate of inflation of 3% per year leads to a 56% rise in prices over a 15-year period. Even a "low" rate of inflation of 2% per year leads to a 35% rise over that same period. How is that conducive to long-term growth?

…The Fed's open market operations are not at all neutral in allocating credit. The Fed creates new balances out of thin air and uses those new balances to purchase Treasury bills from banks. Thus the banking sector is the first to get the use of the new money created in these bank balances. As this new money circulates through the economy, prices rise, and individuals further down the chain experience a higher cost of living before their salaries rise.

...If Congress fails to scrutinize the Fed and the actions of its unelected bureaucrats, it will only have itself to blame as this country's economy crashes and burns.

WaterWings's picture

Slight editorial recommendation:

Fed Up

by Ron Paul, 05.15.09 | Forbes


'Fed Up By Ron Paul'


But only because your love for RP is as strong as mine. Yours might be stronger - I'm a newer convert.

JR's picture

Thanks!  It's either very late...or very early.

Anonymous's picture

Here's the part I don't get about the deflation scenario.
How do governments finance their budgets?
are they going to just close up and start turning out the lights?? Fed, local govt.s WW are on the verge of default.
So where do they get the money from in the big deflation???

Anonymous's picture

Gold is currency. Therefore inflate the price of gold.

People then sell their gold and use their FRN's to buy

more crap.

Now tell me what other 'commodity' besides gold (and silver)

allows you to go somewhere and exchange it for goods and


So those badmouthing both don't know what the hell they're

about and what their intrinsic defensive role is in a fiat

house of cards.

JR's picture


Fed Chairman Ben Bernanke is a man who knows how Washington works and uses that knowledge to great effect.  His appearances on Capitol Hill are always worth watching. He sits politely with his hands folded in front of him playing the bashful professor while one preening congressman after another makes a fool out of himself. In contrast, Bernanke looks like a modest and thoughtful academic faithfully upholding the public's trust.  But things aren't always as they seem. The Fed chief is sticking it to the American people big-time and no one seems to have any idea of what's really going on. Former hedge fund manager Andy Kessler sums it up in a recent Wall Street Journal article, "The Bernanke Market". Here's a clip:

"By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market."

What does it mean?

It means the revered professor Bernanke figured out a way to circumvent Congress and dump more than a trillion dollars into the stock market by laundering the money through the big banks and other failing financial institutions. As Kessler suggests, Bernanke knew the liquidity would pop up in the equities market, thus, building the equity position of the banks so they wouldn't have to grovel to Congress for another TARP-like bailout. Bernanke's actions demonstrate his contempt for the democratic process. The Fed sees itself as a government-unto-itself.

Over at Zero Hedge, Tyler Durden did the math and figured that the recent 45% surge in the S&P 500 had nothing to do with the fictional economic "recovery", but was just more of the Fed's hanky panky. Durden noticed that the money that's been sluicing into stocks hasn't (correspondingly) depleted the money markets. That's the clue that led him to the truth about Bernanke's 6-month stock rally.

Zero Hedge: "Most interesting is the correlation between Money Market totals and the listed stock value since the March lows: a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!

”Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S. banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer, whose net equity was almost negative on March 31, could have some semblance of confidence back and would go ahead and max out his credit card. Alas, as one can see in the money multiplier and velocity of money metrics, U.S. consumers couldn't care less about leveraging themselves any more."

So, the magical "Green Shoots" stock market rally was fueled by a mere $400 billion from the money markets. The rest ($2.3 trillion) was main-lined into the market via Bernanke's quantitative easing (QE) program, of which Krugman and others speak so highly.

Wouldn't you like to know if Bernanke sat down with G-Sax and JPM executives and mapped out the details of this swindle before the printing presses ever started rolling?

Anonymous's picture

hogwash! i buy something at 20 cents and tomorrow it gaps up to 1$. There is no continuity to draw from the two because money markets and the stock market are not zero sum. 20 cents drawn from "my mythical market market" was all that is required to create the additional wealth if someone decides to buy it at 1$.

Anonymous's picture

The chinese are rerouting their purchases of treasuries through hong kong. that much seems obvious although they are doing it at a lesser rate than before;;

Anonymous's picture

The chinese are rerouting their purchases of treasuries through hong kong. that much seems obvious although they are doing it at a lesser rate than before;;

jessiejune's picture

The process of Home Flour Milling Machineis the flow of currency swaps with the oft discussed mismatch in funding requirements for "private" state owned or supported enterprises, especially in the financial sector

sun1's picture

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