Foreign Investors Systematically Dumping US Treasuries

[jon_perez]

Once the rush to sell US notes happens, the dollar is done.

I'm curious.

Why would high T-bill yields/cheap T-bills mean that the dollar is done for?

 

[jon_perez]

Once the rush to sell US notes happens, the dollar is done.

I'm curious.

How would high T-bill yields/cheap T-bills indicate that the dollar is done for?

 

[roguepatriot]

There isn't a reason for China to dump treasuries right now. The price on them is going through the roof and they got in while the yields were still good.

Well the reason to sell would be to diversify out of the dollar.

I agree though on your other point, FALLING interest rates are excellent for bondholders as they translate into capital gains.

Good article that discusses this here:

http://www.safehaven.com/article-9433.htm

 

[Acala]

Dollar done for

Jon-Perez asked:

"I'm curious.

How would high T-bill yields/cheap T-bills indicate that the dollar is done for?"

The exchange value of the dollar, like the exchange value for everything else, is determined by supply and demand. The dollar has been used as the world's reserve currency and the currency of international trade since WWII. This created a HUGE demand that soaked up much of the Fed's massive increase in supply. The exchange value of the dollar suffered, but not nearly as much as it would have without the huge international demand. More than half of all dollars are now held by foreigners.

When inflation reaches a point that the countries that are holding dollars as reserves feel that they muct flee dollars, they will cash in what they have and exchange it for other currencies or assets thereby flooding the market with dollars. That means that whatever is liquid in use for trade will be dumped and any mature notes will be cashed in and the dollars dumped. Whatever notes they can't cash in they will sell at a discount rate, with the discount increasing rapidly as a result of the supply of such notes for sale and the rush to unload them as inflation spirals. At this point nobody will be buying anymore US notes and as soon as existing notes mature, they will be cashed in and the dollars exchanged for other currency. So when the international rush to abandon the dollar begins, it will result in a massive, rapid decrease in demand and, because the US government will no longer be able to borrow dollars, it will have to create more just to pay the bills thereby increasing the supply. So you will have a rapid drop in demand coupled with a rising supply on top of existing inflation (which looks to be over 10% and rising.) Essentilly you are going to have a tsunami of dollars washing up on US shores along with a flood of new dollars pouring out of Washington. I think that means hyper-inflation and the end of the dollar as we have known it. Although there are deflationary forces at work as well, with the collapse of the massive credit bubble. But the Fed is shoveling as fast as they can to try and fill that hole. And they are showing no signs of stopping. By the time they DO stop, (if they do) I think it will be too late and the aforementioned international problem will be triggered and the Fed will not be able to put the brakes on even if they wanted to.

That's my analysis, but I am no expert on this kind of thing.

 

[scooter]

Jon-Perez asked:

"I'm curious.

How would high T-bill yields/cheap T-bills indicate that the dollar is done for?"

The exchange value of the dollar, like the exchange value for everything else, is determined by supply and demand. The dollar has been used as the world's reserve currency and the currency of international trade since WWII. This created a HUGE demand that soaked up much of the Fed's massive increase in supply. The exchange value of the dollar suffered, but not nearly as much as it would have without the huge international demand. More than half of all dollars are now held by foreigners.

When inflation reaches a point that the countries that are holding dollars as reserves feel that they muct flee dollars, they will cash in what they have and exchange it for other currencies or assets thereby flooding the market with dollars. That means that whatever is liquid in use for trade will be dumped and any mature notes will be cashed in and the dollars dumped. Whatever notes they can't cash in they will sell at a discount rate, with the discount increasing rapidly as a result of the supply of such notes for sale and the rush to unload them as inflation spirals. At this point nobody will be buying anymore US notes and as soon as existing notes mature, they will be cashed in and the dollars exchanged for other currency. So when the international rush to abandon the dollar begins, it will result in a massive, rapid decrease in demand and, because the US government will no longer be able to borrow dollars, it will have to create more just to pay the bills thereby increasing the supply. So you will have a rapid drop in demand coupled with a rising supply on top of existing inflation (which looks to be over 10% and rising.) Essentilly you are going to have a tsunami of dollars washing up on US shores along with a flood of new dollars pouring out of Washington. I think that means hyper-inflation and the end of the dollar as we have known it. Although there are deflationary forces at work as well, with the collapse of the massive credit bubble. But the Fed is shoveling as fast as they can to try and fill that hole. And they are showing no signs of stopping. By the time they DO stop, (if they do) I think it will be too late and the aforementioned international problem will be triggered and the Fed will not be able to put the brakes on even if they wanted to.

That's my analysis, but I am no expert on this kind of thing.

What you have described is not possible in the open markets. The countries that use dollars as a reserve have no feasible way to just dump them suddenly. Not only would it be devastating to their holdings, but there also just aren't enough buyers to do that. And as I've said, as long as they don't believe the United States is about to go under as a country, it is profitable for them to hold the bonds while they increase in value.

It sounds like a wild story... the dollar in free fall, the whole world dumping it, etc, but it's not going to happen. They may diversify their holdings a bit, pick up some euros or metals, but the amount of dollars they have in total holdings won't change much. We may not be able to pass as much of our inflation off to the international community in the future, but it will still soak up as many dollars as it can.

Any rational market such as China or Europe is absolutely not interested in breaking ties from the dollar. We are still their number one market and I doubt that is changing any time soon.

 

[Acala]

Maybe

Scooter, you are correct that most of the world would rather not dump the dollar. But we are pushing them into the position where they have no choice.

Holding a few hundred billion dollars in notes that pay 5% interest or less gets to be a very unattractive proposition when inflation stats climbing into the double digits. None of our trading partners are so dependent on our trade that they are willing to lose substantial amounts of their reserves over it. And they are facing a prisoner's dilemma - the first one to break ranks and sell gets the best deal. But once one
country sells, EVERYONE has to sell in order to get out while the getting is not so bad. That is why there is a possibility of a rush for the door.

You say that there wouldn't be buyers, but there are ALWAYS buyers at the right price. That price will go down as US inflation goes up because, of course, those notes will be paid off in devalued dollars. I'm not sure how you think US notes are going to go up in value. The interest rate is already below the rate of inflation and inflation is climbing. And the government has no money to pay off the notes nor does it have any prospects to have any more money in the future. Indeed, the government's obligations are scheduled to increase dramatically beyond the reach of any conceivable scheme of taxation or rate of growth. Just ask the former Comptroller. So not only are US notes losing value because of inflation, they are also an increasing default risk. So much so that Moodys financial has warned that it is going to downgrade US bonds from AAA. This is not fantasy. If the bonds are downgraded there will be an AUTOMATIC sell-off because many holders of US bonds are limited by law and contract to holding only AAA bonds.

Additionally, countries all over the world that have currencies pegged to the dollar are having to inflate at a huge rate to keep up and they are starting to have domestic turmoil over the consequent price increases.

Countries with dollar-pegged currencies are going to start dropping the peg, countries with dollar reserves are going to start shedding those dollars, countries that use dollars for international trade are going to start using other currencies, countries that have loaned us money in the past are going to shy away. These things are already happening. And each one is inflationary. So more inflation drives more to flee the dollar which creates more inflation.

John Connelly once told some foreign ambassadors who were complaining about the inflation of the dollar: "It is our currency but it is your problem". Those days are coming to an end. It is going to be OUR problem soon.

 

[kyleAF]

And as I've said, as long as they don't believe the United States is about to go under as a country, it is profitable for them to hold the bonds while they increase in value.

I'm not sure how you think US notes are going to go up in value. The interest rate is already below the rate of inflation and inflation is climbing.

In conventional investment terms, scooter is correct. In real wealth terms, Acala is correct.

It depends on what you're going after: an increase in the amount of your money, or an increase in the value of your money... i.e. amount of money, or amount of purchasing power.

For instance: the dollar has lost around 30% of its value since 2000. The stock market is currently at roughly a 10% gain in the same time. So people invested long in the major indexes have lost around 20% of their overall wealth, but they've increased the amount of money that they hold.

I prefer real wealth.

 

[kyleAF]

I've heard of this U.S. Treasury rating downgrade, too. Is it even possible for a credit rating agency to do such a thing?

I'm thinking: trumped-up charges of treason or sedition... for undermining the U.S. Government, Inc.