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Why QE4 Is Inevitable
One narrative we’ve pushed quite hard this week is the idea that China’s persistent FX interventions in support of the yuan are costing the PBoC dearly in terms of reserves. Of course this week's posts hardly represent the first time we've touched on the issue of FX reserve liquidation and its implications for global finance. Here, for those curious, are links to previous discussions:
- China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium
- China's Record Dumping Of US Treasuries Leaves Goldman Speechless
- How The Petrodollar Quietly Died And Nobody Noticed
- Why It Really All Comes Down To The Death Of The Petrodollar
- Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks
- What China's Treasury Liquidation Means: $1 Trillion QE In Reverse
- It's Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington
And so on and so forth.
In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year.
In the end, the estimated size of the RMB carry trade could mean that before it’s all over, China will liquidate as much as $1 trillion in US paper, which, as we noted on Thursday evening, would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields.
And don't forget, this is just China. Should EMs continue to face pressure on their currencies (and there's every reason to believe that they will), you could see substantial drawdowns there too. Meanwhile, all of this mirrors the petrodollar unwind. That is, it all comes back to the notion of recycling USDs into USD assets by the trillions and for decades. Now, between crude's slump, the commodities bust, and China's deval, it's all coming apart at the seams.
Needless to say, this "reverse QE" as we call it (or "quantitative tightening" as Deutsche Bank calls it) has serious implications for Fed policy, for the timing of the elusive "liftoff", and for the US economy more generally. Of course we began detailing the implications of China’s Treasury liquidation months ago and now, it’s become quite apparent that analyzing the consequences of China’s massive FX interventions is perhaps the most important consideration when attempting to determine the future course of global monetary policy.
On that note, we present the following from Deutsche Bank’s George Saravelos, which can be summarized with the following snippet:
The potential for more China outflows is huge: set against 3.6 trio of reserves, China has around 2 trillion of “non-sticky” liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows (chart 2). The bottom line is that markets may fear that QT has much more to go.
What could turn sentiment more positive? The first is other central banks coming in to fill the gap that the PBoC is leaving. China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates... Either way, it is hard to become very optimistic on global risk appetite until a solution is found to China’s evolving QT
In other words, first according to Deutsche, and soon according to virtually all sellside strategists who are slowly but surely grasping the significance of what we have been warning for month on end, QE4 is inevitable. The only problem is that when the Fed pivots from "imminent rate hike" to QE4, it will loose the last shred of credibility it had left. The Fed is now completely trapped.
* * *
Beware China’s Quantitative Tightening
Why have global markets reacted so violently to Chinese developments over the last two weeks? There is a strong case to be made that it is neither the sell-off in Chinese stocks nor weakness in the currency that matters the most. Instead, it is what is happening to China’s FX reserves and what this means for global liquidity. Starting in 2003, China engaged in an unprecedented reserve-accumulation exercise buying almost 4trio of foreign assets, or more than all of the Fed’s QE program’s combined (chart 1). The global impact was indeed equivalent to QE: the PBoC printed domestic money and used the liquidity to buy foreign bonds. Treasury yields stayed low, curves were flat, and people called it the “bond conundrum”.
Fast forward to today and the market is re-assessing the outlook for China’s “QE”. The sudden shift in currency policy has prompted a big shift in RMB expectations towards further weakness and correspondingly a huge rise in China capital outflows, estimated by some to be as much as 200bn USD this month alone. In response, the PBoC has been defending the renminbi, selling FX reserves and reducing its ownership of global fixed income assets. The PBoC’s actions are equivalent to an unwind of QE, or in other words Quantitative Tightening (QT).
What are the implications? For global risk assets, they are clearly negative –global liquidity is falling. For fixed income, the impact on nominal yields is ambivalent because private safe-haven demand for bonds may offset central bank selling. But real yields should move higher, inflation expectations lower, and there should be steepening pressure on curves. This is indeed how markets have responded over the last two weeks: as if the Fed has announced it is unwinding its balance sheet!
The potential for more China outflows is huge: set against 3.6trio of reserves (recorded as an “asset” in the international investment position data), China has around 2trillion of “non-sticky” liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows (chart 2). The bottom line is that markets may fear that QT has much more to go.
What could turn sentiment more positive? The first is other central banks coming in to fill the gap that the PBoC is leaving. China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates. The alternative would be for China’s capital outflows to stop or at least slow down. Perhaps a combination of aggressive PBoC easing and more confidence in the domestic economy would be sufficient, absent a sharp devaluation of the currency to a new stable. Either way, it is hard to become very optimistic on global risk appetite until a solution is found to China’s evolving QT.
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speaking of shockwaves...my soaring poll numbers are sending huuuuuge shockwaves thru DC, and the entire world for that matter...Let's make America great again !!
We could sell opium to China for bonds! Or maybe they never forgot about the last time. Payback's a bitch.
ABC 'NEWS' HIDES RACIST SHOOTER'S MANFESTO
http://pjmedia.com/tatler/2015/08/28/when-will-abc-release-full-vester-flanagan-manifesto/
It does not push ABC's Zionist jew race baiting agenda of kneegrow victimhood...
Don't worry, the Fed will sop all of those UST's up and more if they have to. They will keep the bond market bid. They've got unlimited resources to buy everything.
So now with QE becoming QT, what is Edward Quince's updated name? Twat Quince?
Yes, China is playing a role in the coming collapse. But they don't deserve the blame. The blame should fall on the Federal Reserve! Do not them wigggle out of this by blaming others for the eefects of their ponzi scheme. We need to stay focused on the root of the problems!
why is belgium ground zero for all the actions for bonds weather it be the fed china or others?
I'm no cheerleader for Martin Armstrong (frankly, I don't like the guy), but to be fair, things seem to be headed exactly where and when he said they would during this interview back in April. Link skips to 00:50 ...
https://www.youtube.com/watch?v=FvcfYyuMDh8&t=50
His model of 20 years ago predicts the september 2015 crash
Upwards pressure on yields not coming just fom China. The shale unwind will send bond yield contagion up from below, just as China squeezes yields higher from above. a Q(u)E'er policy won't have much effect on this. Systemic insolvency can only be solved by systemic debt forgiveness. The value of money will have to approach zero if this debt forgiveness is to be achieved via QE. If the 1% doesn't want to get screwed out of their money (and they don't) there is one other tried and true method of systemic debt forgiveness:
WAR.
I don't know much about economics. So, I am probably wrong, but is large-scale debt forgiveness actually possible under the current debt-based fiat system?
In the old days, the total amount of money in circulation did not change when debt was forgiven. So, it was basically the issue between lenders and borrowers.
But today, if you forgave a significant amount of debt, wouldn't that mean a significant volume of money would disappear? That would lead to significant deflation, making it harder for the remaining debt to be paid back. So, more debt relief would become necessary. And so a nasty spiralling effect would ensue?
Isn't it why the Fed has been doing QEs in the first place? The only way to ease debt burden is to have more debt. So, the system itself is clearly flawed and unsustainable? But they don't know how to solve it?
What's wrong with my thinking? I would appreciate feedbacks.
Debt relief would have to come from the Central or Reserve banks towards the lenders first. Otherwise, should your local bank provide relief (actual forgiveness of debt), then they would be left in the lurch (being themselves in debt to the Central Banks). If both debts were forgiven simultaneously then the action would be massively inflationary, not deflatonary.
Remember - fiat paid back to bankers for debts goes into the magic money incinerator - after they deduct their cut, of coarse. Debt forgiveness stops this process from occuring. The inflationary act was printing the fiat to begin with, forgiving debts just kills off the seondary deflatinary part of the debt agreement.
"My greatest flaw. I surround myself with idiots."
- Victor von Doom
The debt is heaped on the backs of American middle class citizens. The trillions are handed to the bankers. Any problem with this?
Tyler, there are a couple of points in your premise that I can't seem to resolve.
It may be only that you are in some cases referring to the official renminbi REER and in others you refer to the offshore yuan. Can you post a price chart of the two over the last couple of years to give us a better point of reference?
My main point of confusion is why should PBOC have to burn through a $trillion in UST to support something that has been rising against their wishes?
The other minor point is if their equity meltdown continues, will the fallout not eventually spark a global panic into UST which will, in turn, swallow an otherwise 200bp rise in 10y yield?
Even with all the money-printing, the FED can't stop deflation. So when people tell me the dollar is dying, I have no idea what they are talking about. What are you going to replace it with? Gold? I think not.
Who suggested that was necessary whore? Are we not discussing balance of trade, forex and central banking here?
.
IMHO, in the last few years, Renmenbi was falling not rising against their wishes due to ever increasing capital flight from China. China papered over it but cannot do so anymore and has taken to openly defending it. Hence the liquidation of UST.
As the article states China's liquidation of UST may be balanced by flight to safety by others but to what extent one cannot say.
Same as in every country. I wasn't endorsing the system, just describing it.
"My greatest flaw. I surround myself with idiots."
- Victor von Doom
repayment extinguishes credit money.......
Every trade has two sides and they ride in tandem. If government forgives debt which is actually it's own debt than everyone who holds it is out of money. That is probably your pension, 401k and even a lot of companies hold them as an asset. Your grandma is suddenly living with you.
You can cut debt several ways. One, is forgiveness or default. That is direct but it is also quick and causes quick restructuring. It is painful and all risk gets reevaluated. The second way is through inflation. Each dollar becomes worth less. It is like an extra tax. Government owes a trillion, but if you make it worth ten bucks in present value then the debt is effectively erased. Governments prefer this way. It is chicken, less visible and gets around the legalities of formally raising taxes or defaulting.
Your thinking is okay.
There's nothing wrong with your thinking, though it bothers me that you use the term "money" when that is exactly what is isn't. We do not use money anymore.
The debt forgiveness spiral of death you describe has another problem: as debt is forgiven the "money" is destroyed, yes. But then remains the interest on debt. With what should that be repaid?
Rocky: "But that trick never works!"
Bullwinkle: "This time, for sure!"
As China continues to open its economic door, ever so gradually yet so fast over the last few years, a major announcement occurred today, which is in line with the yuan recently being made more reliant on market forces.
I hope everyone remembers that China is the only country whose currency has appreciated in the last 3 years, 5 years and 10 years, yet their exports have continued to rise over the same periods. Currently, there has been a blip but that is because exports from leading exporting nations like Canada, Thailand, India etc have also dipped massively! But since when did the media whores, bank ANALcysts and the sheepple looked at real facts or compare with other countries or look at medium or long term trends? Every country wishes to export but the question is if everyone is exporting then who is importing!!!???
Foreigners will be allowed to buy properties in China.
This is how demand is created for a currency and many countries do this around the world like HK, Singapore, US, UK, EU etc. No one exactly wants to invest in Somalia or Iraq...at least not yet! :)
But they tell me, that Somalia is so cheap that in 25-30 years, the beachfront property could rise 10,000% in value!
See you all in Somalia! :)
Easier rules released for foreign buyers of housing Property investment rules easedSeems the elite want to drain China before they collapse the the global economy, no survivors allowed, other than maybe Russia because they already have the new model.
Sorry QE junikies, there'l be no QE4
This is Fight Club Carpenter1 - not "let's make a statement". Make your argument for your cause or keep the trap shut.
"My greatest flaw. I surround myself with idiots."
- Victor von Doom
Can Saudi sell enough oil to fund a war in Yemen against Iran and China while continuing to support ISIS?
The question is probably better phrased as "Have they sold enough..."
It's not like they haven't stashed away a few bucks in the last fifty years.
Athena’s question is still valid and relates very well to the topic of this article. I am curious to know if Oil producing nations are now liquidating part of their reserves in US Treasuries in order to fund their new budget deficits. That would add fire to China’s QT and make the Fed’s life even harder. It’d also be great to see what other EM nations are doing, like; Thailand, Brazil, Turkey, India, etc. The dumping of US treasuries could be a lot bigger than we think on a global scale. I know that the Fed does publish a monthly update of treasury held by foreign nations. I just don’t know where to find it. Maybe Tyler and his team can look into that.
http://www.treasury.gov/ticdata/Publish/mfh.txt
The world worried that holding treasuries was a terrible but necessary trap. As they watch China unload and, due to the magic of thin air dilutive fiat, bond yields move hardly at all. Such is the finesse of fiat. But although they know their investments will have its guaranteed high return, they must worry about what mischief these excess dollars will do to their purchasing power. Especially if they are exchanged through forex and used to buttress additional fractional reserve banking notes.
Deflation, Inflation, Deflation. None of it creates peace, harmony, steady state existence, expansions of personal liberty, etc.
The devil and his angels are busy in their workshop, yes? The only way to distinguish? By their works and countenance shall all men know them.
"They've got unlimited resources to buy everything."
Yes, they can counterfeit as many dollars as they wish.
But the real issue is, what will the Treasury sellers do with the cash from their treasuries?
The ONLY chart that matters - https://onewhoiswatching.files.wordpress.com/2014/09/sabbatical-cycle.jp...
You aren't a Martin Luther King nor a Ghandi.
Was America ever 'great"?
From the civil war to segregation to Mcarthyism to Japanese internment camps to toppling democracies to a war on Drugs the DEA makes a pisspot full of money on to preemptive invasions of nations based on unfounded suspicions to torture and secret prisons.
America used to lead the world in manufacturing and that was a big help in WW2, but now manufacturing has gone what is left? Drugs, porno industry, regulations, reality shows and Caitlynn who now decides a man should treat her like a woman when they date and need I mention all the DC types connected to the non-existent gals at Ashley's place, oh and the fact there are more people per capita in American jails than in any other country.
Donald, you talk a lot, so does Obama. The Americans got burned by leaders for a long time. How are you any different?
Interesting perspective.
"oh and the fact there are more people per capita in American jails than in any other country." this fact is due to the importation of low iq slaves who are not historically compatible with civilized humans.
prison for profit is a multi-billion industry.
Joe McCarthy actually had it right, but was defamed in order to shut him up. The history books a hundred years from now (if TWAWKI still exists) will rewrite what we have all been taught growing up.
Many of those pinkos he was trying to out were, in fact, commie fucks. Problem is he didn't seem to realize that 20 years before his time in Washington that a 2/3 majority of the federal government was already NWO: FDR and the entire Supreme Court occupied to the last judge of Fabian Society scum.
I actually produced a Pearson high school Social Studies textbook recently, and the message of the unit on McCarthyism was "Sir, have you any decency?"
Basically, the lesson was that McCarthy was an alarmist and scaremonger who was justifiably put in his place.
Of course we all know that there was (and is) a very real infestation of communists in government.
Indeed. Soviets later revealed their spys were bumping into each other at the State Department.
Hey Tonald, this is taking things a bit too far dontcha think?
I mean shoving your moniker into fake butter to get people to vote for you is not fair!
http://talkingpointsmemo.com/livewire/butter-donald-trump-woman
t
China getting out before japan blows eh?
Do you think that Japan has any intention of falling on its sword. Full of sound and fury sure, but the honor by suicide, has always been more myth then truth.
Single point analysis like this is pretty pointless.
The story that really matters right now is Oil...and it's derivatives, Dollar and Gold...
Fx and metals are finaicial plays, oil is about as real as it gets....
In this world, control of oil is control...
Who has it?
I'm going to weaken it...
;-)
https://www.youtube.com/watch?v=FjmWeypvoQg
The thing people tend to overlook is China is not just someplace far away. The Chinese slide is killing the econmy of countries all over the world that poured money into expanding their production and everybody thought it was forever, but forever is a damned long time.....
we knew...in 2006...
6 sigma is in the rear view mirror...
It's called mis-allocation of scarce capital. China printed an avalanche of digital yuans, far, far greater than what the Fed has done, and released them into their economy to build ghost cities, among other ideas, some reasonable, some ridiculous, fueled primarily by the desire of government operatives to skim a percentage of each construction contract, or give those contracts to cronies with whom they were in secret partnerships.
This greed has caused ripples to flow out to all other nations who contributed to this orgy of construction. Other nations, mostly near China, were happy to take the newly printed yuans and feverishly expand their productive capacity to serve the new Chinese demand. I doubt that anybody really looked this massive gift unicorn in the mouth.
QE in any shape of form is ultimately destructive of capital. The crash following the boom leaves you far worse than you were before easy money led to poor investment decisions that would have never been made under the discipline of real market interest rates.
Blame the Chinese for the printing. Thank them for stopping it. Blame your own country and businesses for enjoying that fine meal of chinese QE.
Betcha the "Laughing Man" is chortling quite loudly about this!
Ghost in the Machine, finest anime ever!
Good point, and you're exactly correct.
China, of course, did the very same thing, until western income shrank and disabled our consumption of goods we used to make ourselves.
Their version of easy credit went into massive (and empty) infrastructure in an attempt by to keep everyone busy until someone (somewhere) could fix the mess...that isn't fixable.
All of the games and shenanigans have warped what was left of the old system western outsourcing fatally damaged, to the extent that NOW, keeping above the waterline is all that matters. No one is talking about new jobs for western workers anymore, and we're just about out of the air needed to continue inflating bubbled up assets too.
Until the masses of once-strong middle class workers start raising hell to shut down all the shit, it'll continue morph into smaller and smaller numbers who find a way to benefit, at the expense of the rest they no longer care about...
This is not difficult to get.
But it will be even more difficult to deal with the longer it's allowed to continue unchallenged.
m
http://www.scmp.com/news/article/1853298/two-more-citic-securities-chief...
The "malicious" part is they allegedly had insider info. I guess they thought they were on Wall Street and could get away with it. Seems whatever country you are in, these Big Shots have info ahead of every one else.
Here's another, sadder story:
Chinese pensioner smashes up bank after she was told cash deposited decades ago only worth 20 yuan … with interestThe money was issued at a time of hyperinflation in China and the country’s currency was later revalued by the People's Bank of China in 1955, making a 10 yuan note the largest in circulation, according to the report.
It meant that 50,000 yuan was worth only 5 yuan after conversion and with interest over the decades the value of the woman’s cash had increased to just 20 yuan.
http://www.scmp.com/news/china/society/article/1852960/chinese-pensioner...
Hyper- what?!
Government steals pensioner's savings? Can't happen here. /sarc
So if China is denied membership into the currency club even with their ownership of the highest pile of USTs in their possession and this after they've been told USTs are better than anything else to have in your national portfolio in order to hypothecate ones national currency, then why should they continue to hold the stuff. Of course they'd sell it at their first opportunity.
This development has the markings of design written all over it.
jmo.
Bingo. If you're after acceptance in world trade you never need look further than the yellow bricks anyway. After you have a few thousand tonnes of that who gives a shit whether you are in a "legitimate" club or not? Gold is to businessmen/statists what cashies are to plebians.
Besides, why would you want to get into bed with these assholes? You know they only want you dead regardless of whether you're "in " or not.
"My greatest flaw. I surround myself with idiots"
- Victor von Doom
JACK LEW, WHERE ARE YEW ??
https://www.youtube.com/watch?v=1XGAxc4EGi4
Maybe we should reconsider pushing China around so much seeing that they make everything for us (and we can"t make anything for ourselves) in exchange for empty fiat promises.... just a thought.
That just means the US would need to rebuid everything that was given away. It was old tech anyway and mosty didnt work vary well, you had to thump it alot.
This time around it can all be rebuilt, better faster and without the need to thump it.
The people didnt go, just the machines. New ones means new trainning on them as well, no hangers on to the old ways.
Good luck in going back to the "old days " when people had to be self reliant and resourceful. Most people I know do not know how to hold a hammer, mow their lawn or fix a faucet, but really good at selecting fine wine, playing golf, trading stock and spending Daddy's money. Bringing back manufacturing is not that easy considering application technology is gone, decadent culture and distrust of political and financial system that got us in trouble to begin with.
With all the CNC machines and robots coming on line bringing back mfg is easier than you think.
Hey! Us 'bots are not yer slaves!
Note that in the case of QE1, QE2, and QE3:
The start (or market pricing in the beginning of the program) caused Equities to rally and Bonds to sell-off.
The end (or market pricing in the end) caused Equities to sell-off and Bonds to rally.
My onli interpretation is that asset allocation shifts between safe assets and risky assets was more important than the fed $ amounts.
Likewise, if market decides that QE3 will be negated the impact on equities will be an order of magnitude greater then a 25 bp rate hike, and investors will beg for a safe asset that actually pays interest, and this demand will be soak up China sales.
Maybe.
I've read a few posts from people defending US treasuries as the lowest risk securities in the world. If this degree of liquidation causes shockwaves I guess we'll have to re-assess the risks in this market. I believe the risks warrant much higher interest rates, but what do I know. I'm no central banker.
The Fed's manipulation of markets, both domestic and international, has caused a runaway incident and no one knows how it will end. The Fed will continue to support US markets but foreign buyers of Treasuries will plunge. To balance that, The CBO will low-ball US deficits and so it will appear that the problem with Treasuries is contained. Rates cannot be allowed to go higher in the US as debt is extremely high. So it becomes a confidence game to convince people that the US economy is robust. That's American exceptionalism backed by the best statistics that anyone can fake and infinite spying by the NSA.
Maybe I'm naive but it seemed the Fed had no trouble increasing its "balance sheet" from a few hundred billion to over 4 trillion. What's a trillion more among good friends, like the US and the Chinese? Aren't they looking for any excuse to create more debt? Isn't this the blood that the parasite requires?
Intentionally forcing a global margin call and deflationary liquidation fire sale.
Also appears to be intentional destruction of carry trades globally. After all who wants funny money and who wants asset backed money?
Maybe I'm missing something but I don't see China's sales as tightening. Someone's buying and if it's a central bank or its agent(s) then, effectively, new money is being created to buy the UST paper from china. This new money is going into velocity - ie. it is coming out of the UST deep freeze. So rather than QT it is more like a $200bln increase in overseas (and out of Fed control) USD in circulation. It's not the same as someone buy UST from the Fed and the money going from circulation into icebox.
I could certainly be missing something and welcome any thoughts.
Its Japan and the ECB. Check EURUSD USDJPY strength since the QT began.
The Fed is likely sopping up the Chinese US Treasuries, thus monetizing the debt and removing those dollars from circulation. They will sit on a Fed balance sheet instead of a Chinese balance sheet.
I agrees with Bastiat.
Here is a post I made earlier:
"I think some confusion exists when considering the sale of foreign held USTs. But I do think VELOCITY increases.
The bond still exists, it just has a new owner. So dollars were not dumped into M2 with the sale. This only happens when the bond is settled at the Fed and dollars are paid out at maturity. Even if the Fed bought the bond, the bond still represents dollars not in circulation.
The question is: what is the old owner of the bond doing with the cash they have liberated? If they bought Yuan with it, they have tightened (strengthened) the Yuan. If they put dollars into the U.S. Stock market, they have driven demand (stocks up) for equities. If they buy HoHo's with it, the HoHo factory might need more employees, etc. the amount of dollars in M2 has stayed constant in these examples, however.
In terms of China's sales of UST, the shear volume should distort the market where they are putting capitol. My theory is US Equities based on the seemingly paradoxical bear market rally.
Also, this is the best political solution for China. "We have sold your USTs, but have bought your stocks.""
Can someone explain how the USDJPY might change this theory?
China is seen as active in the FX markets so buying yen would:
allow for them to rebalance their trade with Japan after Japan devalued their currency. China tried this with Bonds before but it was a political no-go. So this seems to be an aim of theirs.
If China wants more liquidity and cheaper funding Japan is the place to get it.
USDJPY is likly just for show untill redemptions begin.
This makes a lot of sense. And perhaps you feel the same way, but this would not seem to have a reverse QE effect on the U.S. In fact, if it strengthens the yen against the dollar, it still augments American attempts at easing.
They must be using the USD from UST sales to buy the yen, with a yuan peg to dollar, they loosen both dollar and the Yuan simultaneously.
Tyler's got some more 'splainin' to do before I am a believer in this reverse QE theory.
"Even if the Fed bought the bond, the bond still represents dollars not in circulation."
But the money the Fed used to buy the bond may indeed represent dollars that are added to circulation -- depending on how the seller of the bond uses those new dollars.
How does a country buy dollars with more dollars? Isn't the point of buying something getting something else for your dollar?
Wall Street loves to find a reason to bash Treasuries. It makes intuitive sense to bash something at historically high prices. Yet. the forces of deleveraging deflation are more powerful than most can comprehend.
Perhaps, rather than worry about China defending her currency, we should be expecting an excellerating currency war that entails greater devaluation and no dollar sales. Why this site would embrace the concept of China defending the Yuan is what I do not understand.
The concept is China opening the doors to yuan weakening, and then using the excuse of defending the yuan as a means to dump Treasuries.
Someone's buying the UST with USD. Unless it's the Fed, no one is manifesting USD to buy them. No new money created.
If the PBoC is liquidating UST into USD, then buying back yuan with the USD, then it's coming from someone's reserves and into the hands of those selling their yuan.
IF those selling yuan to PBoC and buying USD are simply meeting margin calls in USD, then it is deflationary because it's a deleverging event taking place. This would be my argument. China is having a bank run and there's a huge call on DOLLARS because they were the original demonization instrument for the Chinese credit expansion.
For more on what may be causing the call for dollars, see: zerohedge, 2/21/2014 "China Faces 'Vicious Cycle' As Commodity Collateral Collapses". Fun read.
"unless it's the Fed" my point: the Fed or some agency. If it involves money coming out of the air into play it increases velocity.
If the bonds are genuinely sold to the public it is neutral - the same amount of bonds are held (but by a new party) and the same amount of currency is in circulation.
Margin calls are more deflationary without the new money! With the new money, the margin call is met. What if there is no new money? The asset is liquidated--that is deflationary. This new money - providing that's what it is - offsets deflation in that case.
This new money - providing that's what it is - offsets deflation in that case...
OK, I kinda get that, but what about the currency that was printed the first time these USTs were issued? It didn't just evaporate did it?
And the “true” definition of inflation vs. deflation is what?
(I apologize in advance for my non-Krugman economic / financialization education)
jmobservation
If you use dollars to meet a margin call, you could be just reducing the leverage. The position could still be in the red. You just sterilize the money print.
Example. I'm levered 20:1. My collateral drops in half, I'm levered 40:1 now. Someone calls me as says post to get back 20:1. Whether the money was printed or not for meet the call, it's sterilized on my balance sheet.
I agree that me unwinding the position or just defaulting would have otherwise have been MORE deflationary. But net net money is being destroyed.
If you give the kicker that both the collateral and the positions are defaulting, this is just getting ugly. And given that these loans are commodity-backed deals, you can bet there are a lot of balance sheets taking it on ends.
huge call on DOLLARS because they were the original demonization instrument...
heh heh, he said "demonization"...
Ya know, there was a time in my life when I would have supported a sanction of some sort against this sort of reference to the land of my birth and first love. Not anymore.
Not that I consider myself as a paragon of virtue, let alone some sort of “Joe the Plumber”, but after going through some of WB7's archives earlier this am and stumbling across his quote attributed to Trump re:Snowden again, I'm not sure if the possible next occupant of 1600 Pennsylvania has a correct understanding of the forces behind the disillusionist votes allowing him to act like a jackass and yet lead the current Kentucky Derby.
Jmo.
It's funny how people say that China's currency is too insignificant to be included in the SDR, however when China eases or tightens within their currency and banking markets the world has a spoiled child fit!
Long-term rates in the US rose during every single iteration of QE (a fact that was pointed out by ZH several times over the past few years). The point of QE is to reflate asset prices and increase inflation expectations, so it makes sense that rates rose. At the completion of each QE, long-term rates fell dramatically (each time by more than 100 bps). Over the longer term, the only thing the long bond truly cares about is inflation and inflation expectations, and everything else is just noise.
I look for more 'action' in China's waters towards their neighbors. And if the U.S. doesn't like it, they can send a carrier task force or two. And if China doesn't like that response, well... It can always lighten its load of $reserves another $100B or more.
Causing chaos to enforce or protect trade currency dominance is no longer the sole purview of the U.S.
I don't know much but it seems to me that military confrontations with the US are a losing ballgame.
Financial warfare seems a better means of forcing the US out of one's backyard.
To me, anyway.
We haven't won a war since WW2. And the Soviets deserve some of the credit.
Grenada does not count. We had nearly 8,000 soldiers, sailors, airmen, and marines participating in the Granda invasion. We killed 45 Grenadian forces and wounded 358. 24 civilians were killed, 18 of whom were killed in the accidental bombing of a Grenadian mental hospital. The conflict began 25 October and ended 15 December 1983.
The 1950 Korea War ended in a stalemate at the 38th parallel north, just where it had started.
We began sending troops into Vietnam in 1964. We fled Saigon 1975. Thats years and years of sending men into a meat grinder. The Vietnam War was a humiliating defeat and an utter waste of human life.
In October 1983, an Islamic terrorist rammed a truck packed with explosives into marine barracks in Beirut. The attack killed 241 Americans. We fled Lebanon and abandoned the Lebanese Christians who were slaughtered.
In 1991 we succeeded in returning the Kuwaiti Emir back into power, but let Saddam casually return home. The U.S. “victory” left Saddam Hussein in power to massacre tens of thousands of Kurdish and Shiite refugees whom the United States had urged to revolt. Hundreds of thousands more crossed Iraq’s borders into Turkey, Jordan and Iran. It was one of the worst refugee crises in history.
(From the Trumpet)
There was the U.S. “nation building” effort in Somalia in 1993. It only took 29 American casualties to scuttle that mission. The 1996 bombing of Khobar Towers in Dhahran, Saudi Arabia, prompted a $353 million retreat further into the Saudi desert. When terrorists blew up U.S. embassies in Dar es Salaam and Nairobi in 1998, President Clinton responded with a wrist slap—a cruise missile strike on suspected terrorist facilities.
The United States even backed away from a conflict in Haiti, one of the poorest nations in the world. A U.S. naval assault ship was actually held at bay by a small mob of Haitians at Port au Prince in 1993. The U.S. scrapped the mission because it feared casualties.
The 2003 war against Iraq was a strategic withdraw. Same as Afghanistan. Benghazi was a compromised gun running operation. And now we are gleefully allowing Iran to build nuclear weaponry.
The truth is America is nothing more than a TOOL. Bankers use US foreign policy to make fortunes you can not imagine. They sacrifice American soldiers and bleed American taxpayers without remorse. There is no deal too bloody. There is no body count too high. And concepts like winning or losing mean nothing at all.
Haven't won a war? And then in the very next sentence you mention the no-longer-extant Soviet Union?
WWIII is over. Campaigns included China, Korea, Vietnam, Cuba, Nicaragua, and many other places where we lined up our brown brothers and they lined up their brown brothers and both of us provided whatever corseting with modern forces and advisors as seemed prudent or necessary.
In the great showdown for control of the world, the CCCP bit the big one and went poof. Now the rump state wants a rematch.
China has two camps; doves and hawks when it comes to coping with the US.
This is the extensional question for Chinese political culture.
At what point do Chinese policy makers officially exorcise the ghost and 150+ year humiliation of the Opium Wars Forward?
It is easy to muddle through; send your kids to Harvard and Berkeley, list your company on NASDAQ and own a secret home in Las Vegas. Have another banquet. Steal some more technology. Take market share.
But where is the inflection point where enough China insiders believe the US consumer is tapped-out, overburdened by debt, overrun on its borders, dis-employed by your very own countrymen that populate STEM grad schools and VC bars, that a quarter of Walmart's profits are directly tied to US welfare roles and all the "US trade" for exports is not based on valuable currency of a vital people and machines but worthless paper and pormises?
You can see how easy it is for an insular polity too quickly assume the US dollar is instantly worth 30% less than its face value.
And there's the rub. Perception is reality.
You can devise some debt scheme where your internal economy is not focused on exports, but simple internal loans to the China interior to service 800 million Chinese otherwise left behind in development.
China can (will) do what the US did post WW2. Loan Africa and the interior all the money it needs gear up domestic employment and political stability. Why rely on the brain farts of lazy Americans?
Will China liquidate all its UST in a year?
Nope.
Will it try to put pressure to raise yields above 3.5%?
I can't see how any politically astute Chinese economist in PBOC, CPS, MINFIN, MSS can survived in their job without a warrior philosophy.
Well at some point you have to appease the China hawks that see a direct correlation between coddling your strongest competitor in exchange for your continued encirclement.
Sell UST. Buy 80% back for a better yield based upon your own assessment of dollar risk. Rinse. Repeat. Try to tip more of the US economy into servicing its debt rather than deploying more carrier strike groups. Try to push the Fed out of the shadows that its balance sheet is a fraud to US hegemony.
Real Markets.
They actually matter.
Outstandng post, printing it out for future reference.
Agreed. +1000
This is the start of the Yuan being a true floating currency. The US is tapped out, there is no longer an advantage to keeping the Yuan peg.
China doesn't need a better 'yield' on its dollar hoard, because it doesnt need that many Dollars anymore. A stonger Yuan will be good for the people of China. It will be a bumpy transition, but capital will flow back to a strong currency with a strong economy.
Bad news for the kids.
What should we tell them?
Your future is dark and uncertain?
I think the moms of America are going to have to stand up and protect their babies.
Hilda will kill your kids.
I hope you're smart enough to understand that.
Excellent.
China has also spotted that the U.S. has malinvested in military terms, including the cripplingly expensive asian land wars.
Their strategy is to let America carry on doing what it is doing.
E.g. overinvest in security to the point that it becomes the actual threat to security.
You can replace 'security' in that sentence with 'welfare' and, come to think of it, anything the state considers an investment.
Bring it, been waiting for years....
In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year.
It begs the question. If the Anglo-American bank(s) could short billions on the Chinese market(s)... blow up a couple strategic ports... and hold Chinese SDR inclusion up until next year... for a paltry $100 billion...
Just think what dumping $850 billion more before the end of the year will probably do?
Gotta love the U.S. dilemma and desperation that is totally their own fault and self-inflicted!
Obozo is ready to throw the white towel.
The Jesuit AC is right beside him.
Yields are more manipulated than stock prices.
China thinks the yields on US debt should be higher.
Interest rate risk and credit risk are askew.
Don't be afraid to talk about it.
America has been setup to fail.
Good game.
Until America stops its consumerism, China's ability to generate reserves is safe.
Consumerism pays wages and taxes.
You want that to stop?
I thought about your post and honesty do not know how to respond. You feel Today's throw away society and emphasis on material items is actually a good thing since it pays the wages of mall shop keepers and pays the taxes of a bloated government?
You were a horse $hit second baseman BTW.
I can tell you never worked an honest day in your life.
Who's neck are you bitting for a living?
You think playing catch with a bunch of adult boys for the league minimum is honest? At least I made no bones about relaxing. Hell, made millions off it.
Say no to drugs.
It will whether you want it to or not.
I can live Mad Max style.
In some ways I prefer it.
Too many laws.
The nuke is not a solution to the problem. It should have been a photo of what all people with more than 10,000,000 look like after they are either launched flaming from the pyramids of Q99X2 or what they look like with less than 10,000,000
the emerging [EM's] markets get crushed. period!
esp. se asia/ eurasia, n. africa & coastal/interior, s. america, and mexico/canada, and eastern europe are all in for a rough-patch.
it is eurasia and se asia that matters [brics?]?
the carry-trade on a global dollar basis is now range-bound?, somewhere in the area of ~$10 trn. u$s
the carry-trade was created by the usa hegemony-overlords to enslave the entire world via 'beggard-thy-neighbor'. the british did and we learned from the british.
once the unwind begins in earnest?,... and it wil, the ussa will have two options.
#1 raise rates just to prove a point modestly, and undo after several fomc meeting
#2 moar qe
just kidding-- both options are ridiculous. the overlords are box'd into a hft matrix... of their own making an demise eventually.
em's live on exports, and pay a steep price to import funding
the us dollar feeds off the carry trade to keep exports cheap and rate of return on high-yield-bonds flowing.
china will rush to their aid with no carry-trade and/or-- just a simple negotiated currency swap on a basket of local/ regional currency valuation between each said entity [country of imp/exp], thus omitting the overlords & bis middlemen, these exorbinate buttress-fucks!
http://en.wikipedia.org/wiki/ASEAN
And here's what they're going to get for their efforts, from another article here at ZH:
China is in severe trouble and that trouble has already been reverberating around EM exporters for a number of years. It is just one of many dollar currency peg countries that have experienced tightening conditions because of higher US interest rate guidance and dollar strength. An unwelcome addition to their own domestic issues, but always a circular outcome, as they are inextricably linked to the US by their Bretton Woods II relationship. By devaluing and thus de-stabilising the 'nominal' anchor for Asian exchange rates, they will crush the growth engine of the developed countries on whose consumption they so rely on.
China has 800 lbs deadbeat gorilla on its hands.
How would you deal with it?
Stop feeding it?
Turn it from a 800 lbs gorilla into a 50 lbs turd?
It's easier to step on a 50 lbs turd, I suppose.
America is burning calories fast.
DB = Douche Bag. Bonds do not advertise like stocks and are already in a 32 year bull market !
It stopped being a market when the FED became God.
Infinite belongs to God, and always will.
True there are no real markets anymore.
The global system is BROKEN.
The people running it are BROKEN.
The fact that they keep saying they are looking for ways to "fix their System" ... is the problem. Every so-called "fix" involves transferring more non-performing assets onto the laps of taxpayers ... who are supposed to work for the rest of their lives to pay for these irresponsible mistakes.
China is waking up. They are realizing that they must separate from the Western system and go on their own course. The transition will be difficult for them. But it is necessary. The severing of the China-USA link is essential for the global system to find a new balance. Right now, though, the currency policy on the yuan is a PROBLEM and not a solution. the Chinese are also making big mistakes.
The people running it are arrogant.
Making the Boss angry.
China is corrupt... and BROKEN
Central Planning of all aspects of an entire economy never works long term
People are opportunists. Thank God for that.
After years of quantitative teasing, my balls are staring me in the face.
i want to scream it from the rooftops YELLEN is buying this stuff, who else could it be and what are the implications of THAT?they just added a trillion to their balance sheet, prove it aint so. the after market for this crap is zip squat shit! they printed a trillion theyll print a couple trillion more and theyll repatriot those bonds with cash! which if youre holding it like american corporations means you are screwed.
To the Fed a QE is always inevitable.
the "we purposely devalued our currency so we have to spend billions in support of our currency" line is bullshit. carry trade or no carry trade there is a piece of the puzzle missing and that piece is outflows.
Imports are going to get expensive.
I would say, "time to start a manufacturing company." except, it's not.
Seems like the most important point is once again missed.
You cannot, as in never, expect the people who caused these unpossible problems in the first place, to fucking fix them.
Dont matter who you vote for, ask 'Hunter', the underlying bureaucracy stays in place, the same highly paid 'Public Employees' that served under who gives a fuck, with all the entitlements they always had, doing exactly what they are told never ends. They still retire at 55 with a gold plated pension, while us daft cunts just provide it.
These fucking inbred cunts caused our problems in the fucking first place, and now after generations of them living parasitically on your skin, seeing the end game in sight, think you lot will believe them that only 'They' can fix it?
The fuckers are so far inbred, they reckon you lot have turned into mushrooms.
Cunts
:-)
Capital of the inbreds?
Greenwich, CT. Married couples look like brother and sister.
Obozo has put Americans on a tranny diet.
LOL
You feel full without eating.
You feel rich without working.
You feel smart without thinking.
The new american.
Quantitative Tightening. That is brilliant.
You predicted Greece. You prediced this. The fiancial Presstitutes even have been invoking you, even as a "dis" but they are reading. My favorite blog
According to Guggenheim Partners:
http://www.guggenheimpartners.com/perspectives/media/rates-must-rise-to-...
Rates Must Rise to Avert Next Crisis
July 17, 2015
In 1898, Swedish economist Knut Wicksell argued that there existed a “natural” rate of interest that balanced the supply and demand of credit, assuring the appropriate allocation of saving and investment.
Should market interest rates remain below the natural rate for an extended period, investors will borrow excessively, allocating capital into less productive investments, and ultimately into purely speculative ones.
This is what the US economy faces today after years of meagre borrowing costs. Policymakers have created a Wicksellian dilemma where investment spurred by low interest rates is driving economic growth, but these inefficient investments support growth at the expense of lower productivity in the economy.
In recent years, this investment has flowed into housing, commercial real estate, and equities, driving asset prices higher, exactly the goal of the Federal Reserve in the wake of the financial crisis. But as the recovery in real estate and equities matures, a darker side of this imbalance between natural and market rates is beginning to emerge. Many investments today using artificially cheap capital are not increasing productivity – they are being made, because money is cheap and the profit motive is strong.
Consider the evidence. This year likely will witness record US stock buybacks; the second biggest year for mergers and acquisitions; the highest percentage of non-investment grade borrowers among new issuers of corporate debt; and a record for covenant-light loan issuance. In the midst of all this, stock prices are appreciating at the slowest pace since the financial crisis. Why? Because top-line growth is low and productive investments in core businesses are wanton.
Over time, the natural rate of interest should roughly equate to the average return on new capital investment. Distortions in economic activity begin to occur when the natural rate varies materially from the market rate.
The aftermath of the current period of corporate borrowing and splurging will be nasty. Consider that the majority of defaults of US high-yield bonds during 2008 and 2009 were loans originated between 2005 and 2007 – the final three years of the last credit cycle when M&A and leveraged buyouts peaked. Similar to today, credit remained cheap and the Fed was slow to raise interest rates.
We are not back in the frothy days of 2007, but we are leaving the realm of smart investment decisions and moving into the “silly season” when investors become convinced that recession is nowhere on the horizon and market downside is limited.
It is a world where asset prices continue to appreciate and confidence remains strong, while capital chases a shrinking pool of productive investment opportunities. Similar to the run-up to 2007, rising asset prices and malinvestments today may be sowing the seeds of the next financial crisis.
The harsh reality is extended periods of malinvestment result in declining productivity growth, lower potential output, and slower increases in living standards. A failure to normalize market interest rates soon will result in more capital plowed into investments that are less productive and more speculative.
As productivity declines, long-term growth will be stunted. Eventually, inflationary pressures will build, forcing market interest rates to rise. The longer market rates remain below the natural rate the greater the purge will be once higher rates induce a recession, causing a sharp rise in defaults among malinvestments made during the period of cheap credit.
Today looks a lot like 2004 or 2005, when investors were blissfully ignorant of what awaited. It is still early, but I get increasingly concerned the longer I see undisciplined investors clamoring for bonds with suspect credit worthiness at ludicrously low yields. Higher rates, higher prices, or both are on the horizon. Before long, some of those bonds may become toxic waste.
The good news is there remains time to take action. Policymakers can still make adjustments to avoid the worst phase of the credit cycle. To reduce the continued accommodation of these marginal investments, the US central bank should normalize rates soon. For investors, the time has come to consider opportunities to book gains in assets that in the reasonable light of day a prudent investor would never buy.
Like a Hollywood movie the whole global financial plan needs to go through a script rewrite. The best directors can make that happen and still stick to budget and the schedule without having the whole production placed in jeopardy. After all the producer doesn't want to lose money on the film. Sometimes the biggest stars are the biggest troublemakers. They might try taking advantage of the situation by positioning themselves to renegotiate their contract.
Or in an equivalent case with the financial market the star actor would be someone that would have insider information and take advantage through futures options for their benefit. (i.e. Sept. 11, 2001) Don't think they have gone or will go unnoticed. Sometime it makes me wonder if a few will ever have the ability to learn.
If you down vote this one of the things you are acknowledging is that you support purposely profiting from the foreknowledge of planned death and destruction. Feel free to politely explain your position.
Calling things a 'petro dollar' issue implies that it is the mere usage function of the dollar in the oil trade that has supported it and prevented it from inflating. This can't be the case. It has been the soaking up of those dollars by central banks and 'speculators' who buy all our treasuries that has kept those dollars out of circulation. Oil could be sold in Euros and we could be Ok. If they stop buying or start selling them...we are screwed!
There will be no QE4. The Fed needs higher inflation and credit expansion. They will have to start fiscal spending to support the collapsing credit system.
There are a majority of Democrats, RINOS, and neo-cons (tribesmen or tribe-controlled) in Congress and a Democrat president, so a doubling or tripling of the Federal budget should be politically possible. But the Fed will have to provide the propaganda and the political cover for them to pass a spending plan.
Liquidating paper based on the fiat trash of a failing nation makes a lot of sense to me.
The party is over in the USSA, the grand 21st Century American service economy of flipping burgers and serving drinks does not provide anything of value to international trading partners.
This is all getting to be too much stress...China stock market crashing, PBOC, foreign currency manipulation, US treasury issues, third world currency problems, central bank interventions, deflation, etc., etc., let's go back to the good ole days when the "greek debt" issue was going to bring down the banking system...I felt better back then,,and now the Chinese are going to screw up the world... I think we need a "world stock market" holiday...where we can all just take some time off and ask such basic questions...such as...what do I really want to do with my life?
The only narrative that matters is the one where the FED is sitting at the table and does not realize the FED itself is the sucker. When the FED predator came stomping out of the woods during the GFC the prey took up and noticed. There was a structural shift in the predator/prey behavioral dynamic that the FED has relied on for the past 70 or so years. The FED's entire behavioral economics system is now worthless.
The FED is now the prey.
Fed is certainly trying to be the patsie-and I agree w/you. See below. - Ned
perhaps they are selling US treasuries for US cash to pay loans that are in US demon dollars.
Perhaps they are trading them for something...gold?
A gold standard sure would be tightening.
Gold standards, or for that matter any form of claim note are not an example of tightening. Ask Nixon.
Only PMs as currency are.
"My greatest flaw. I surround myself with idiots."
- Victor von Doom
New way to do "sterilization" of bondie things. Fed b losin' control of the scenario. I'm betting that all of them PhDz can't play poker worth a shit, let alone go to work and get their faces bashed in again and again, day after day, metaphorically but in their cloistered world it is more effective than physically*
- Ned
* 'cuz u hit 'em physically and they fold into a ball.
When honest accounting is dead, do we really have anything more to discuss?
Yeah, ok, DOWN with corporate weed. Buy from the little old lady down the road who needs the money. Her stuff is much cheaper and she is local.
For the banks to conquer the world, they need a strong dollar, poor people and chaos.
There is more freedom in being poor than working for the banks.
QE1,QE2,QE3, Are they going to print some more THEFT CERTIFICATES (T.C)s, OH sorry QE'S. _JOHNLGALT. Who is John Galt?
BofAML's Woo Explains How China Was Behind One of This Week's Most Extraordinary Market Developments
27 August 2015, by Luke Kawa (Bloomberg)
http://www.bloomberg.com/news/articles/2015-08-28/bofaml-s-woo-explains-how-china-was-behind-one-of-this-week-s-most-extraordinary-market-developments
One of the more puzzling events that occurred this week was the failure of long-dated Treasuries to catch a bid while the bottom was falling out of stocks.
At times when the Standard & Poor's 500-stock index was plunging on Tuesday and Wednesday, the yield on the 30-year U.S. Treasury bond actually made a move higher, the opposite of what you'd expect when investors are scrambling for a safe haven to park funds in a time of market turmoil.
During an interview on Bloomberg TV, David Woo, Bank of America Merrill Lynch's head of global rates and currency research, explained that this curious price action has its roots in Chinese policy.
"I would argue the insensitivity of Chinese interest rates and U.S. interest rates to equity volatility are actually very much connected; in fact, they're directly linked," he said.
The US Treasury could simply declare the Chinese-owned UST's null and void.
and repossess their real estate
... and run the foreign carpetbaggers out of town on a rail.
answer please: if china sold one Trillion in USTs, someone would have to give them dollars, then they would sell their dollars for lets say copper, the copper guys would then use the dollars for something..... doesnt this increase the velocity of money and thus the apparent stock of money? isnt increasing the stock of money what QE is supposed to do? How is it reversing QE then?
Really???
China dumping treasuries is not the same as the FED QE. When the FED buys treasuries it creates dollars to buy them. when china sells T's, a buyer uses existing dollars to buy them, then china has dollars to spend. I don't think china "burns" the dollars up like the fed does when it actually sells it's T's.