Bloomberg: If China Dumps US Bonds - It Helps the US more than Tafiffs

Discussion in 'Economics' started by bone, May 14, 2019.

  1. bone

    bone ET Sponsor

    If China Sells Its U.S. Bonds, Trump Will Benefit
    A sell-off would result in a weaker dollar, which would help reduce the U.S. trade deficit with China.

    "U.S. business and political leaders have long worried that China’s large holdings of U.S. Treasuries might be a strategic vulnerability for America. Those fears were stoked this morning when the editor-in-chief of an English-language organ of the state media, the Global Times, tweeted that Chinese scholars were looking into ways to sell off Treasuries:

    China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China. Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.

    — Hu Xijin 胡锡进 (@HuXijin_GT) May 13, 2019
    Some discussion about such a move wouldn’t be surprising. But if Chinese scholars want to be truthful, there is only one thing they can tell their leaders: Dumping U.S. Treasuries would not only wreak havoc with the Chinese economy, it would play right into Donald Trump’s hands.

    A large sale of Treasuries would have two main effects on the U.S. and global markets, both of which the president has been clamoring for.

    The first and most obvious effect would be to drive down the price of U.S. government bonds. Price and yield are inversely related. So selling would have the effect of driving up interest rates on U.S. Treasuries.

    At first this might seem to go against Trump’s oft-stated preference for lower interest rates. And in fact interest rates on Treasuries closely track those set by the Federal Reserve:

    But Trump’s obsession with interest rates stems from a larger concern — boosting economic growth. He only wants the Fed to lower rates so U.S. banks will put some of their $1.4 trillion in reserves to work in the economy. A huge sale of U.S. Treasuries by China would have a similar effect: As interest rates on Treasuries began to rise, banks would use some of their reserves to buy more Treasuries. That spending would put more cash into the wider U.S. economy and stimulate growth.

    There is a second, somewhat related, effect of a sale of Chinese bonds: It would drive down the value of the dollar. When China sells U.S. bonds, it receives dollars in exchange. The Chinese could use those dollars to buy other U.S. assets, but the whole point of selling Treasuries is for China to divest from all U.S. assets.

    That means the Chinese would need to exchange their dollars for some other currency — euros, pounds or even the yuan. Putting so many dollars on the foreign-exchange market would weaken the value of the dollar. The effect would be to drive up the price of foreign imports for U.S. consumers and drive down the price of U.S. exports.

    Trump has already made it clear that he thinks America should be exporting more and importing less, and is willing to accomplish that goal by raising tariffs. A weaker dollar would likewise push Americans to buy fewer foreign goods and encourage foreigners to buy U.S. goods. Administration officials seem to realize this, which is why Treasury Secretary Steven Mnuchin called for a weaker dollar in Davos last year.

    At some point, the dollar would get so weak that imports from China would be balanced by increased exports. The trade deficit with China would effectively be eliminated — one of Trump’s main goals.

    To be clear, this process would be painful for U.S. consumers, just as the tariffs are. In this case, however, the proximate cause of the pain would not be Trump’s tariffs but China’s selling. In short, if China decided to sell huge amounts of U.S. Treasuries, it would do far more to accomplish Trump’s goals than any tariffs he might impose."
    Nobert, TraDaToR and dozu888 like this.
  2. Here4money


    Is that a roundabout way of saying it hurts the US less than tariffs?
  3. dozu888


    I actually made the exact same 2 points yesterday... 'great minds think alike' would sound like boasting... but 'independent minds think alike' should be fair, because if you think logically, you'd only reach the only possible conclusion.

    yes like this article said - initially bonds go down, rates go up, but the banks will step in, or the Fed steps in directly, makes no difference.... if you lent a lot of money to the bully down the street, in a currency the bully can print, you are gonna scare him by selling the notes.. LOL.
  4. dozu888


    people need to wake up and have some perspective... this is what the trade war is all about... imagine if the US$ and the RMB switch positions -

    military dominance - gone;
    unlimited printing rights - gone;
    cheap goods in Walmart - gone;
    Western values and ideology - gone;
    your children's future - gone;

    Too many Americans don't realize how lucky we are - we are printing out of thin air to tax globally - dollars go out, goods and services come in.. it is unamerican and shameful if you don't rally behind the president.

    This is real war.
    volpri likes this.
  5. bone

    bone ET Sponsor

    It means that China is in a very tight box. With Mexico, Vietnam, Korea, India, Malaysia, the Philippines and probably a dozen other Countries all doing everything possible to host low cost manufacturing.
    dealmaker likes this.
  6. dozu888


    if they keep stealing IPs they will get to a place where the other low cost guys can't replace... that's why it's urgent to do something NOW!

    thank God we got Trump.

    and as a side note - the whole Russian collusion thing being pushed to the American public, is really an insult to the general public's intelligence... or perhaps regretfully an accurate indication of how uninformed the public is.

    Russia's GDP is a mere 1.72% of the world GDP, it doesn't move the needle anymore! China's is 15%.. almost 10 fold bigger.. yet the public can watch MSNBC for 2 years about the Russian collusion, as if we were still in the cold war era and the USSR was still our equal.... such a pity that the public is sold not only a hoax, but also a very low quality hoax... sad and funny at the same time.... I guarantee if you ask 100 random guys on the street, maybe 1 guy can give a correct answer that the GDP ratio is 15 to 1.7 between China and Russia. The real threat is at the gate, yet too many Americans have no clue.
    Last edited: May 14, 2019
    volpri and Money Trust like this.