China Sold Second-Largest Amount Ever Of US Treasurys In December: And Guess Who Comes To The Rescue

Tyler Durden's picture




 

While we will have more to say about the disastrous December TIC data shortly, which was released early today, and which showed a dramatic plunge in foreign purchases of US securities in December - the month when the S&P soared to all time highs and when everyone was panicking about the 3% barrier in the 10 Year being breached and resulting in a selloff in Tsy paper - one thing stands out. The chart below shows holdings of Chinese Treasurys (pending revision of course, as the Treasury department is quite fond of ajdusting this data series with annual regularity): in a nutshell, Chinese Treasury holdings plunged by the most in two years, after China offloaded some $48 billion in paper, bringing its total to only $1268.9 billion, down from $1316.7 billion, and back to a level last seen in March 2013! 

 

This was the second largest dump by China in history with the sole exception of December 2011.

 

That this happened at a time when Chinese FX reserves soared to all time highs, and when China had gobs of spare cash lying around and not investing in US paper should be quite troubling to anyone who follows the nuanced game theory between the US and its largest external creditor, and the signals China sends to the world when it comes to its confidence in the US.

Yet what was truly surprising is that despite the plunge in Chinese holdings, and Japanese holdings which also dropped by $4 billion in December, is that total foreign holdings of US Treasurys increased in December, from $5716.9 billion to 5794.9 billion.

Why? Because of this country. Guess which one it is without looking at legend.

 

That's right: at a time when America's two largest foreign creditors, China and Japan, went on a buyers strike, the entity that came to the US rescue was Belgium, which as most know is simply another name for... Europe: the continent that has just a modest amount of its own excess debt to worry about. One wonders what favors were (and are) being exchanged behind the scenes in order to preserve the semblance that "all is well"?

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Tue, 02/18/2014 - 12:41 | 4448386 DeadFred
DeadFred's picture

Of course all this took place before the "F- the EU" phone call was released. I'll be curious to see numbers we see in April. By the way USD is on support and not looking too bouncy. Tank the S&P to strengthen the dollar or let FX hell break loose while stocks hit new highs, what's a manipulator to do?

Tue, 02/18/2014 - 12:59 | 4448498 kito
kito's picture

are you really naive enough to think the central banks give a f* about some little spat between diplomats?

Tue, 02/18/2014 - 17:50 | 4449857 Dugald
Dugald's picture

 

 

about some little spat between silly little diplomats?

Tue, 02/18/2014 - 18:28 | 4450025 Arius
Arius's picture

these are not diplomats!  last time i checked Merkel occupied the highest office in Germany!

you can call ZH audience naive but not the Chancellor of Germany!

Tue, 02/18/2014 - 15:49 | 4449297 Urban Redneck
Urban Redneck's picture

1) you can't actually wire money, the receiving institution is actually just giving you some of theirs for a few hours...

2) the "money" that people think they are wiring across international borders doesn't even exist.

ergo

It is impossible to wire money to another bank that actually does exist.

Tue, 02/18/2014 - 12:29 | 4448321 eclectic syncretist
eclectic syncretist's picture

China sells 3.5% of their holdings and Belgium's triple?  Should have been Holland next door, cuz that's where the story about the boy with his finger in the dike comes from, and that's about what Belgium did here.

Tue, 02/18/2014 - 14:12 | 4448855 SWRichmond
SWRichmond's picture

Belgian Tripel? 

Westmalle, bitches.

Tue, 02/18/2014 - 15:51 | 4449305 Annoyingserf
Annoyingserf's picture

I'm partial to the Gouden Carolus....haven't tried Westmalle.  

Tue, 02/18/2014 - 18:39 | 4450057 TeamDepends
TeamDepends's picture

Excellent choice.  Enjoying a Leffe Brun right now.

Tue, 02/18/2014 - 19:19 | 4450185 SWRichmond
SWRichmond's picture

Westmalle is pricey, so a treat every now and again.  The Gouden Carolus and Karmeliet are available in four-packs of single-serving bottles.  Both are excellent, the Karmeliet prob better IMO. 

 

Tue, 02/18/2014 - 16:30 | 4449490 fockewulf190
fockewulf190's picture

I thought Belgium has a debt to GDP of 100%.  Great idea, let´s go more in the hole with paper that destroys principle.

Tue, 02/18/2014 - 17:53 | 4449873 Dugald
Dugald's picture

 

Oh yukky, finger in a dyke......that's taken care of my breakfast....

Tue, 02/18/2014 - 17:54 | 4449874 Dugald
Dugald's picture

 

Oh yukky, finger in a dyke......that's taken care of my breakfast....

Tue, 02/18/2014 - 18:20 | 4449991 Stuck on Zero
Stuck on Zero's picture

Did China sell the Treasuries are let them expire without rolling them over?  It's a fundamental difference.

 

Wed, 02/19/2014 - 00:28 | 4451445 logically possible
logically possible's picture

Good point, but either way I don't think they are in the market to buy them back anytime soon.

Tue, 02/18/2014 - 21:09 | 4450725 jerry_theking_lawler
jerry_theking_lawler's picture

I've always wanted to stick my finger in a dike.....

Wed, 02/19/2014 - 01:41 | 4451544 effendi
effendi's picture

Would that dyke have a name like Hillary, Moochele or Janet?

I thoughr only Barry liked little boys sticking fingers in him.

Tue, 02/18/2014 - 12:21 | 4448277 RSloane
RSloane's picture

I think it was Slaughterer who outright warned people not to short the S&P. Meanwhile, back at Daneric's, they're busy counting resistance floors should the slinky meet the edge of the stair after discounting that as a likely scenario.

Tue, 02/18/2014 - 12:30 | 4448324 fonzannoon
fonzannoon's picture

Well I don't follow Daneric's but I hope for their sake it's just one giant echo chamber. Because that is the way it should be. They definitely should not evaluate themselves on any level. That would be bad.

Tue, 02/18/2014 - 12:47 | 4448428 RSloane
RSloane's picture

Their statement last week: "Varying degrees of rebound. A lot of divergence and crosscurrents.  The rally is stretched." Daneric puts up a graph, fierce fighting ensues re what it might mean to traders. There is, however, an absence of the doomsday scenario or the belief that the market will crash horribly and a greater depression will ensue. There is also the total absence of the hyperinflation scenario as we all know wage supression, unemployment, and underemployment are all handy devices for controlling inflation.

I'm still of the "thousand papercuts" mind which will take place over the next thirty years and not tomorrow. Automation will have a lot to do with any demise we might be staring in the face.

Tue, 02/18/2014 - 13:19 | 4448588 Oldwood
Oldwood's picture

As a complete market rube here, explain how a crash would happen? I assume that a crash would be the result of people selling, trying to get their money out, but if this was based upon actual stinky data, that we all know already exists, what good would the cash be that they extracted at such a heavy cost in the first place? My point is there must be someplace for the money to go, and there isn't. As screwed as it all seems, our government's ability to print more faster than anyone else is what is now considered safe ground. Again, I know nothing, but that is how I see it. Regardless, I see it all as corrupt and find it difficult to imagine getting back into it, even it did profit me. Stupid I guess.

Tue, 02/18/2014 - 13:22 | 4448609 fonzannoon
fonzannoon's picture

One of the big underlying theories out there is that the world is divesting itself of Treasuries. If you read the headline of this article you would think that is happening. The guts of the report (Belgium aside) indicates otherwise. That's all I am saying. 

Tue, 02/18/2014 - 13:37 | 4448694 Oldwood
Oldwood's picture

It just feels like we are trapped by the financial world that prevents us from acting in a natural rational way to defend ourselves. Its like we are sitting on top of a bomb with a pressure switch which will detonate if we try to get up and run. In order to divest a person must move from one store of wealth to another, but when all stores of wealth are ultimately evaluated by the same entity, what is the point?

Tue, 02/18/2014 - 13:38 | 4448696 Overfed
Overfed's picture

I wonder why yer get junked so hard. Maybe yer just not tellin' the gallery what they want to hear? There may be a crash coming, but this isn't it. I do wonder, however, how much of China's treasuries that the EU could possibly absorb.

Tue, 02/18/2014 - 14:03 | 4448810 James_Cole
James_Cole's picture

I wonder why yer get junked so hard. Maybe yer just not tellin' the gallery what they want to hear? 

buy UST = antithetical to zh. The funny thing is the UST buying has been on like donkey kong. Perhaps china has other reasons to sell? hmmm

Tue, 02/18/2014 - 23:53 | 4451351 Ness.
Ness.'s picture

If you didn't buy UST when the 10yr was sniffing 3% you derserve to lose your money.  3% on the 10yr is the 'be-all-to-end-all' for the US eCONomy. It can never breach that level.  Mr. Yellen, with the help of the CIA, will make sure of that.

Tue, 02/18/2014 - 14:34 | 4448978 1000924014093
1000924014093's picture

The fastest way to collect down arrows is to post what ZHers do not want to hear.

ZH is only valuable as a resource to the extent that it is NOT just an echo chamber for doom mongers, financial apocalypse fantasists, folks who stray in from infowars, etc.  I've moved over the last two years from one of those very people to someone who thinks our financial disaster will be long drawn out, with lots of smaller black swans till the eventual and completely unpredictable end game scenario.

Oh, and thanks Fonzanoon.

Tue, 02/18/2014 - 17:36 | 4449797 JeffB
JeffB's picture

"I wonder why yer get junked so hard"

He has a 12 to 1 up arrow to down arrow ratio at the moment on the post you replied to. That doesn't seem like piling on to me.

Tue, 02/18/2014 - 14:36 | 4448833 Ham-bone
Ham-bone's picture

Fonz - right you are that there seems little to see here on the Treasury front - China proper holds $50 B below their all-time highs and exact amount they held last August...since August HK has increased their holdings by $30 B and are at record holdings...and as Fonz sez, despite slower issuance of Treasury's, "foreigners" continue to increase their holdings of US paper. 

Also very noteworthy is that "foreigners" are holding an ever larger % of outstanding public Treasury debt...particularly as intra-gov (SS) holdings may peak this year and all growth in US debt is going into the public debt...intra-gov debt has flatlined and will begin ebbing over coming years due to slower SS payments and greater payouts.  (Takeaway is all new debt will be on the public side and the only willing buyers are "foreigners" and the Fed...domestic holdings continue sliding both in total and as a %.

IE., this would seem a really dangerous place for "foreigners" and the Fed to own almost 80% of all Notes / Bonds of outstanding public debt...would seem with a simple decree those silly "foreigners" could be paid off in $5 T in "funny money" hot off the digital printer...but something tells me these "foreigners" aren't that dumb.  They are being rewarded for playing along.

But such a policy of ensuring ever lower rates and ever ready buyers of US debt does have it's points of leakage - primarily PM's and the dollar...and both are very precariously showing "leakage".  No need to watch the Treasury market...the dollars created from nothing and passed around to CB's / PD's do have an achilles heel and that weakness is more vulnerable than ever right now.

Tue, 02/18/2014 - 17:20 | 4449726 DrunkenMonkey
DrunkenMonkey's picture

Has anyone ever really imagined what systemic financial collapse would be like ? i.e. Cards not accepted, and no access to fresh cash etc.

Perhaps they (the pols and central bankers) have worked out that their countries will be swallowed whole by predators giving birth to a new feudal age, should the system fail ?

Sooner or later we all pass through the 5 stages of grief (Kubler-Ross) and arrive at acceptance, for better or worse.

Tue, 02/18/2014 - 14:33 | 4448975 JeffB
JeffB's picture

"One of the big underlying theories out there is that the world is divesting itself of Treasuries. If you read the headline of this article you would think that is happening. The guts of the report (Belgium aside) indicates otherwise."

In a sane world, I think people should be divesting themselves of Treasuries whose yields are artificially held way low, particularly given the massive and growing debt as well as the deteriorating financial condition of the U.S.

But this doesn't seem to be a sane world, and the world banksters seem to be playing shell games, trying to trick the sheeple into believing that all is well.

Does it really make any sense for Japan, who is itself in debt in excess of 200% of GDP and who barely receives enough in revenues to pay the interest on their own debt, despite it also being held artificially low, to be buying tens of billions more in U.S. debt? Or Great Britain to be doing so despite their own significant financial troubles?

There appears to be a significant amount of subterfuge in trying to hide the fact that governments around the world are monetizing their deficits. The U.S. loans hundreds of billions of $ to Europe, and then England, also up to its eyeballs in debt buys 10s of billions of US Treasuries. They buy each other's debt and it doesn't look so bad.

If Japan had money to burn, why not pay down some of its own debt before buying hundreds of billions of Treasuries at near zero rates?

Tue, 02/18/2014 - 15:45 | 4449269 nope-1004
nope-1004's picture

Exactly.  It's a giant circle among anglo bankers.  It's a complete shell game and farce.  Looking at figures and charts is a  waste of time.  The world is broke.  The US and EU are insolvent.  All the headlines indicating buying of UST's is done by the US itself.

 

Tue, 02/18/2014 - 15:57 | 4449314 Ham-bone
Ham-bone's picture

Jan '08 Belgium held $13 B in Treasuries...had never held more than $30 B...

Amazing Belgium used it's gigantic trade surplus of dollars and focused them in high yielding Treasury's that are sure to not be paid back in inflated dollars.

BTW - these assignments of Treasury's to "foreign" nations seem to be of dubious nature...as TIC notes

"The data are collected primarily from U.S.-based custodians. Since U.S. securities held in overseas custody accounts may not be attributed to the actual owners, the data may not provide a precise accounting of individual country ownership of Treasury securities"

Tue, 02/18/2014 - 16:35 | 4449421 Ham-bone
Ham-bone's picture

this data really is utterly worthless...read.

Long and short of this is we have no idea who bought these, who owns these, only where they are purchased and being held.  Nothing to stop the Fed or ESF or whatever to buy all the Treasury's they want with free money and hold them in China or Japan or Belgium to attribute them to "foreigners" rather than Fed???  If this is 10% right, be very very afraid of the dollar.

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticfaq2.aspx#q7

Questions on country classification in TIC data:

7. What are the problems of geographic attribution for securities holdings and transactions in the TIC system?
The annual Survey reports and the monthly table on Major Foreign Holders of Treasury Securities (MFH) report estimated foreign holdings of U.S. Treasury securities.

Beginning with data for end-September 2011, which were first reported at end-February 2012, the MFH estimates are based primarily on custodial data from the TIC SLT. These data help provide a window into foreign ownership of U.S. Treasury securities, but they cannot attribute holdings of U.S. Treasury securities with complete accuracy. For example, if a U.S. Treasury security purchased by a foreign resident is held in a custodial account in a third country, the true country of ownership of the security will not be reflected in the data. The custodial data will also not properly attribute U.S. Treasury securities managed by foreign private portfolio managers who invest on behalf of residents of other countries. In addition, foreign countries may hold dollars and other U.S. assets in offshore accounts that are not captured in the TIC data. For these reasons, it is difficult to draw precise conclusions about changes in the foreign holdings of U.S. financial assets by individual countries from TIC data.

The country attribution of foreign holdings of U.S. securities as reported in the position surveys and in the SLT is imperfect because some foreign owners entrust the safekeeping of their securities to institutions that are neither in the United States nor in the owner's country of residence. For example, a German investor may buy a U.S. security and place it in the custody of a Swiss bank. In the surveys of foreign holdings of U.S. securities, such a holding is recorded against Switzerland rather than Germany. This "custodial bias" contributes to the large recorded foreign holdings of U.S. securities in major financial centers, such as Belgium, the Caribbean banking centers, Luxembourg, Switzerland, and the United Kingdom.

In addition to the shortcomings of the position data, the country allocation in the data on transactions in long-term securities as reported on TIC Form S is also imperfect because transactions are recorded against the country of the foreign transactor dealing directly with the TIC Form S reporter. For example, when a U.S. resident purchases Japanese securities and the transaction is executed by a financial intermediary in London, the purchase of foreign securities is recorded against the United Kingdom rather than Japan. Likewise, if an Italian resident purchases U.S. securities through an financial intermediary in Switzerland, the sale of U.S. securities would be recorded against Switzerland, not Italy. Because cross-border securities transactions take place disproportionately in major international financial centers such as the United Kingdom and the Caribbean banking centers, large net transactions in those areas do not necessarily reflect acquisitions or sales by investors in those areas.

In data prior to January 2012, the beginning of monthly SLT data, this "transactions bias" can further distort the country allocation of foreign holdings of securities when estimates of holdings are made for months not covered by the periodic surveys. These estimates have typically been made by adding net transactions recorded against a given country to the most recently reported survey position for that country. (Adding estimated valuation changes can produce more reliable estimates, especially for some types of securities such as stocks.) For some countries, the transactions bias will lead to an under-estimate of holdings, as some of the net purchases of U.S. securities recorded against international financial centers reflect net purchases of residents of other countries. Conversely, for other countries, the transactions bias will lead to an overestimate of holdings by residents of those countries.

A useful example that illustrates both custodial and transactions bias is that of estimated securities holdings by residents of the United Kingdom. The June 2011 survey measure of U.S. Treasury securities held by residents of the United Kingdom is $135.7 billion. This relatively high level of U.K. holdings primarily reflects the custodial bias of the United Kingdom: at $135.7 billion, the United Kingdom was the fourth largest recorded foreign holder of U.S. Treasuries. The estimate derived from the previous survey as of June 2010, adjusted forward by adding U.K. net purchases over the 12-month period until June 2011, however, is much larger: $347 billion. The difference between the 2011 survey measure and the estimate based on the 2010 survey measure primarily reflects the additional transactions bias of the United Kingdom as a major international financial center.

Custodial bias is not a problem for measured U.S. holdings of foreign securities in the periodic asset surveys, because the security-by-security construction of those estimates allows for accurate attribution of the country of issuance of the foreign securities.  END.

 

Tue, 02/18/2014 - 17:05 | 4449553 Ham-bone
Ham-bone's picture

What makes more sense -

that the Fed ran (runs) a secondary QE program (perhaps equal to the on-books QE...perhaps double) through foreign financial centers of the world through countries like Ireland, Belgium, Norway, Taiwan, UK, HK, Russia, etc, etc. to maintain the US Treasury bid / yield and these purchases are "attributed" in the nation where they are purchased (not to purchaser)

ie, who believes that our good friend Russia increased their holdings from $8 B in Jan '07 to $140 B today???  Make sense???

ie, how bout China increasing from $400 B in '07 to $1.268 T now in US Treasury debt???

ie, how about Norway who held $0 in June '07 now holding $97 B in Treasury debt???  Make sense???

ie, Ireland held $10 B in '07...now holds $125 B???  Make sense???

And on and on...

OR

These countries love american debt that yields nothing, will be paid back in inflated dollars, and ties them to a dollar based global system they are trying to move away from???  Since '08 they have all supposedly massively increased their holdings for somebody???

 

Tue, 02/18/2014 - 17:29 | 4449762 JeffB
JeffB's picture

Thanks for those posts, Ham-bone. I for one found them informative and on point.

Tue, 02/18/2014 - 18:22 | 4449986 Ham-bone
Ham-bone's picture

If above is even remotely correct - Dollar may be the dirtiest dirty shirt!!!

These nations are de-dollarizing asap via removing dollar trading (particularly China/ Russia), talking dollar down, but strangely their attributed holdings only go up...perhaps they really are moving away and we only see the facade of dollar stabiliteeeee'

The biggest "red flag" in this is the Fed tapering.  The Fed were buying all medium term Notes / all Bonds (up to their 70% limit) but on their stated exit from QE, "Foreigners" who own $5 T+ (double the Fed's holdings) would have seen rates would be rising and prices falling...if they were "investors" they would have been selling.  The Fed would have known they could never taper without a rate shock.  But no selling...no yields to the moon.  These "foreigners" are not "investors".  This is someone unconcerned with taking losses.

Tue, 02/18/2014 - 20:36 | 4450556 JeffB
JeffB's picture

Yeah, I see red flags all over. It seems so obvious that it's a little baffling to me when I see so many seem to think that things are fine, or that we're just going through a little rough patch and we'll be humming along soon.

It is especially puzzling given that in the years leading up to the financial crisis that exploded onto the scene in 2007/2008 a number of economists, the Austrian economists in particular were jumping up and down warning of the danger of the big run up in debt. I remember getting literature in the mail a few years earlier warning about the bubble in housing prices, and the rising defaults and how this was going to result in catastrophe.

The mainstream economists mislead virtually all of the public into thinking that things just couldn't be going better economically... and on the surface they were right. But the fundamentals were completely unsustainable and they should have known that. The classic YouTube clip juxtaposing Peter Schiff warning about the coming collapse in real estate and the havoc it could cause, and the TV pundits, not to mention Ben Bernanke pooh poohing such an idea, with some of the talking heads even making fun of Schiff after he was off the air:

YouTube - Bernanke was wrong while Peter Schiff was right

Even Paul Krugman admitted that the mainstream economists were completely caught with their pants down on this one:

How Did Economists Get It So Wrong? - NYTimes.com

It was rather disconcerting to see the mainstream pundit applaud Bernanke after the disaster he not only didn't see coming, but had been one of the main architects therof. Time even made him "Man of the Year". Meanwhile the Austrian economists, who had been warning of what was going to happen, and then watched it unfold almost exactly as they had predicted, albeit not on any exact timetable, were still seen as the fringe nut cases.

Worse yet, was when the Fed put any dispute about their role in the crisis to rest, at least as far as the mainstream media was concerned, and the people they lead by the nose, when they exhonerated themselves from blame in their investigation of themselves.

Peter Schiff had a nice article on that topic, I think:  Fed to People: It's Not Our Fault

Even some of the mainstream economists had finally begun to fret about the housing bubble, and I remember a conference hosted by The Economist, where the editor of the magazine asked the rhetorical question, ~ "How far ahead of a crisis can you sound a warning without losing your credibility?". She lamented that some economists had warned about the crisis a few years before it hit, but then began to lose credibility as the bubble continued on unabated. They looked somewhat foolish in their predictions of a housing crash even as the housing prices continued to climb month after month, year after year... until it finally popped.

They say that those who don't know, or forget, their history are doomed to repeat it. Unfortunately, it seems we're heading for an even worse disaster this time, as memories of the last crisis seem to have faded so quickly for so many. Now we're having a number of folks on ZH making fun of the ZH morons who are all chicken littles warning that the sky is falling. That seems a little brash to me given our recent history, particularly given that we still have many of the same folks running the economic show, and virtually all of them have doubled down on the same bubble blowing strategy that brought us the last series of ever increasing crises. I think it's all the more reprehensible given that their economic strategies would have been ridiculed by any common man on the street of a decade... or a century ago. In my opinion it is a very reckless gamble that is likely to have catastrophic consequences and it really seems to make little if any sense, other than a last ditch gamble to try and avert a catastrophe in the very near term, but making the underlying problems pushing us towards disaster all that much worse.

 

Tue, 02/18/2014 - 21:54 | 4450930 Ham-bone
Ham-bone's picture

the ZH in-fighting is interesting...those who believe manipulation has no bounds vs. those who expect a bond collapse or dollar collapse or PM spike...something is bout to give but which one is really a political determination and not based on laws of supp;y demand or the like.  My worthless two cents is were bout to see that dollar collapse and PM superspike.  BTW - I'm 0 for everything on my predictions...

Tue, 02/18/2014 - 22:40 | 4451089 JeffB
JeffB's picture

If you put time frames on those predictions you're more likely to be wrong.

Of course, if you can't get the timing at least reasonably close, it takes away much of any investing advantage.

and, the Fed and the various governments around the world are the elephants in the room that can change the landscape in a hurry, making predictions all the more precarious.

But I don't see how things can just continue on as is ad infinitum. Something's going to have to give eventually.

Tue, 02/18/2014 - 19:57 | 4450347 thestarl
thestarl's picture

Likewise even though my fucking head is about to explode but the circle jerk analogy rings true to me

Tue, 02/18/2014 - 18:30 | 4450033 waterwitch
waterwitch's picture

Re-hypothecated QE!

Tue, 02/18/2014 - 23:30 | 4451268 DaveyJones
DaveyJones's picture

well said

Tue, 02/18/2014 - 15:58 | 4449333 Solon the Destroyer
Solon the Destroyer's picture

Does it really make any sense for Japan, who is itself in debt in excess of 200% of GDP and who barely receives enough in revenues to pay the interest on their own debt, despite it also being held artificially low, to be buying tens of billions more in U.S. debt? Or Great Britain to be doing so despite their own significant financial troubles?

Absolutely it does when your name is Abe and your mission is to devalue the yen against the dollar. If you do the converse and sell UST's to repatriate into yen and pay your own debt...

If Japan had money to burn, why not pay down some of its own debt before buying hundreds of billions of Treasuries at near zero rates?

This should be obvious, but if they were to take that measure, the resulting upticks on the interest on their debt would cripple the country and servicing that debt would eat up ALL government revenues.  Also, see the converse situation above.

Friedman Fucked all Folks with the Faulty Forex Story he sold to Nixon, FFS.

Tue, 02/18/2014 - 16:38 | 4449531 odatruf
odatruf's picture

Solon - please explain how there would be a "resulting uptick" in the interest on their debt if Japan took some cash that they used to buy US Ttreasuries and instead either bought back some of their own debt or didn't sell as much of it at their next auction. Thanks in advance.

 

Tue, 02/18/2014 - 20:13 | 4450424 Solon the Destroyer
Solon the Destroyer's picture

Sure...

Foreign reserves are often used to judge the risk a sovereign's bonds represent. A reduction of foreign reserves, especially of a substantial amount, would likely have an effect on a sovereign's bond market (although Japan is a bit of a weird case, so who knows in practice).

Not to mention the concomitant effects of increasing the value of the yen against the dollar and thus worsening exports, and of reducing the money supply by paying off debt and all the deflationary impact that strategy represents.

Friedman fucked everyone up. Once his theory that FOREX reserves would be non-existent or limited in a floating exchange world were disproved in practice, the whole shebang should have been abandoned and a return to settlement by gold payment enforced internationally.  Instead we all are importing and exporting both inflation and deflation left, right and center.

Tue, 02/18/2014 - 21:29 | 4450781 JeffB
JeffB's picture

Thanks for the followup, Solon, but it still doesn't convince me.

"Foreign reserves are often used to judge the risk a sovereign's bonds represent. A reduction of foreign reserves, especially of a substantial amount, would likely have an effect on a sovereign's bond market (although Japan is a bit of a weird case, so who knows in practice)."

That's true, but debt is certainly used to judge the risk a sovereign's bonds represent as well. If I was evaluating such risk, I would probably consider a country in effect borrowing money to buy another country's debt more of a risk than one that just issued less of its own debt. At best I would consider that tradeoff a wash.

"Not to mention the concomitant effects of increasing the value of the yen against the dollar and thus worsening exports,"

That's probably the best argument for it, and yet the results in practice seem to be far less beneficial for them than many predicted. They have to import almost all of their energy after all, so it also has a big impact on their production costs. That must be at least a pretty big factor on why their trade deficit has hit record after record even as they devalue the yen month after month.

Japanese Exports Drop More Than Expected Smashing Adj. Trade Balance To New Record Low

It appears Abe and his henchmen had better stop doing things and say something as the huge devaluation of the JPY so far is NOT having the effect he had hoped for. ... on a seasonally-adjusted basis, the Japanese Trade Balance just hit a new all-time record low (negative).


Abenomics Humiliated Again As Japan Posts 15th Consecutive (And Record) Trade Deficit  10/21/2013

Every month we say it, and every month it just keeps getting worse: RIP Abenomics... until next month, when it will be RIP-er. Overnight Japan posted its latest, September, trade numbers which were absolutely abysmal, as the trade deficit rose to a fresh record high of 932 billion yen ($9.5 billion), the 15th consecutive monthly shortfall.

 

JPY Dumps And Nikkei Explodes As Japan's (32nd Month In A Row) Adjusted Trade Deficit Hits Record High

The Japanese trade balance (adjusted) shows a deficit for the 32nd month in a row and has surged to its largest (worst) level on record.

For what it's worth, that strategy of devaluing the yen as fast as possible has hardly been the big boost to exports and the economy that had been predicted.

---

"and of reducing the money supply by paying off debt and all the deflationary impact that strategy represents."

It wouldn't have to be deflationary, if they bought their own bonds, which is after all, "monetizing their debt".

 

Tue, 02/18/2014 - 16:41 | 4449541 JeffB
JeffB's picture

"If Japan had money to burn, why not pay down some of its own debt before buying hundreds of billions of Treasuries at near zero rates?

This should be obvious, but if they were to take that measure, the resulting upticks on the interest on their debt would cripple the country and servicing that debt would eat up ALL government revenues.  Also, see the converse situation above."

It's not obvious to me why paying down their debt would result in an uptick on their interest rate.

But I do understand the theory of Abenomics on trying to print in exponentially rising fashion to match the exponentially rising debt in order to steal the shortfall from the debt holders via the hidden inflation tax. Of course I think that's an immoral attempt at a way out, and I think it will still cause them much pain in the end.

 

Tue, 02/18/2014 - 16:08 | 4449371 caShOnlY
caShOnlY's picture

There appears to be a significant amount of subterfuge in trying to hide the fact that governments around the world are monetizing their deficits.

The CBs who are "allies" are monetizing each others debt, when needed.  In this case the call came.  How long can this game play?

Tue, 02/18/2014 - 14:18 | 4448897 JeffB
JeffB's picture

"there must be someplace for the money to go, and there isn't."

I suppose there's always someplace for money to go, at least there always has been in the past:

German Marks fuel the fire

Question about past hyperinflations

 

 

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