Trade War with China

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Anlsvrthng

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Tam said:
If countries unload their Treasuries, that means the pool of Treasuries increased (supply up). New Treasuries being issued by the Treasury has to compete with old Treasuries so they can sell and that means they are forced to have higher interest to pay the investors more and make them more attractive. New Treasuries need to be issued by the Treasury to pay the yearly deficit which is $1 trillion a year now. Higher interest rates on Treasuries are passed on to the banks as higher borrowing interest, which raises the business expenses of companies.

Fed can buy up excess Treasuries through quantitative easing by printing money to buy up the Treasuries but something happens. This is uncharted territory when a central bank now holds over $4.5 trillion in debt.

Fed held treasuries have only two fates:

1. They are allowed to mature, which means the Treasury has to pay the Fed, and the only way to do that is to further increase the deficit --- which is used to pay for the maturing notes and their interest --- by issuing more Treasuries. Payment of these treasuries by maturation is part of the yearly deficit. So the hole only gets bigger. And to soak up more excess Treasuries, which means more QE, which means printing more money to use to buy these Treasuries, and printing more money will lead to inflation and devaluation of currency.

2. Sell the Treasuries to the market so that investors, like foreigners, buy them. This has the same effect as countries unloading their Treasuries, and you will be forced to raise the interest rates of your new Treasuries to compete with the older ones. This leads us back to the first paragraph.

For either, the result is a cyclical black hole because more debt is being made to pay off existing debt.
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Point 1. ->
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Point 2. Same as point 1 .The FED is capable to manipulate the yield curve. It target the inflation and unemployment, and that is affected by the supply/demand of goods NOT by the amount of treasuries on the open market.

In practice the treasuries has a very liquid secondary market, and on that the price of the treasury calculated based on the maturity and interest, with a discount.
So, if the current treasury yield 3% then the you can buy a 100$ atone year later maturity for bit less than 97$.

So, how China can push down the discount of treasuries, if the FED simply keeping to lend the banks on the same interest rate, so they capable to mop up the Chines treasuries ? I mean, China needs to increase the unemployment OR increase the prices.

The custom increase the prices, but the increase in price 1:1 coming from government income (customs).

I think China can be more successful if it start an EXPORT customs for Chinese good if want to increase the treasury discount. That will increase the inflation without increase in the government income.
 
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Anlsvrthng

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Tam said:
Holding Treasuries is also a reserve wealth. Destroying Treasuries is like as good as burning wealth. This idea will lead to rampant inflation and devalued currency.

The Fed selling Treasuries and other debt it holds in measured proportions is a mechanism for destroying or "de-creating" money, which is essential for controlling inflation. You need that to clean up excess money supply. The Treasury can also use the excess money supply to pay off maturing Treasuries, which this cleans up the money supply. When a Treasury is paid off, it essentially means that the same amount of money equivalent to the Treasury has been "de-created" and taken off from the money supply.
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Interesting.

If the FED buy the treasuries, the government pay the fed. The fed send back the profit to the government.
So if the treasury price is too low for the FED taste, then it just can increase the demand for it.

If the FED burn the treasuries then the government doesn't need to pay it back the PRINCIPAL to the FED, in the hold until maturity it doesn't need to pay back the profit made between the actual market price and the FED target market price.

Means the hold until maturity make less money by magnitude(s) than the burning of treasuries. So, the burning can create hyperinflation, the hold until maturity only manipulate the yield curve, and doesn't let the treasury interest to grow higher than the target by the FED.

Very interesting.
 
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Anlsvrthng

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tidalwave said:
I ask for a past event and you give me a handbook, guide line that doesn't look like anything relate to it
How does that relate to if no country willing to pick up excessive treasury.?
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So, say China wants to sell her treasuries for something different than US dollar?
and no one wants to give China anything like that?

On the market if there is a seller, but no buyer then the price has to drop until there is a buyer.

So,the US dollar value will drop like the stone .
The US will not have money to cover the import, and it has to run trade surplus to write down the part of the debt, and to afford the import.
Wage inflation in the US, need to build industries and hire people, improve efficiency and so on.
Reason of election of Mr Trump .


In practice, the US write down its foreign debt like in 1971.

But of course the influence of US will decrease dramatically.
 
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Anlsvrthng

Captain
Registered Member
tidalwave said:
I don't get it. How does wage inflation or inflation in general improve efficiency??
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Inflation (wage inflation) kick in IF the workforce is scare.

Means the businesses has to fight for workforce, and the efficient corporations has advantage over the more productive.

I think it is straightforward.

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Tam

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Anlsvrthng said:
Point 1. ->
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Point 2. Same as point 1 .The FED is capable to manipulate the yield curve. It target the inflation and unemployment, and that is affected by the supply/demand of goods NOT by the amount of treasuries on the open market.
Click to expand...

No. That's not what the link implies. The supply and demand of the particular good is the Treasury itself. If you have too much existing Treasuries in the open market, issue new Treasuries will have to compete with them and this leads to higher interest. There is talk even now about the interest hitting as high as 5%. The whole exercise of quantitative easing to remove debt from the market.

In practice the treasuries has a very liquid secondary market, and on that the price of the treasury calculated based on the maturity and interest, with a discount.
So, if the current treasury yield 3% then the you can buy a 100$ atone year later maturity for bit less than 97$.

So, how China can push down the discount of treasuries, if the FED simply keeping to lend the banks on the same interest rate, so they capable to mop up the Chines treasuries ? I mean, China needs to increase the unemployment OR increase the prices.

The custom increase the prices, but the increase in price 1:1 coming from government income (customs).

I think China can be more successful if it start an EXPORT customs for Chinese good if want to increase the treasury discount. That will increase the inflation without increase in the government income.
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None of what you are saying makes any sense. To sell Treasuries and not to buy new ones, you are not after increasing inflation, you are increasing interest rates, which makes borrowing overall more expensive to the US economy and that will cause the economy to slow down and head for a recession.
 
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Tam

Brigadier
Registered Member
Anlsvrthng said:
Interesting.

If the FED buy the treasuries, the government pay the fed. The fed send back the profit to the government.
So if the treasury price is too low for the FED taste, then it just can increase the demand for it.

If the FED burn the treasuries then the government doesn't need to pay it back the PRINCIPAL to the FED, in the hold until maturity it doesn't need to pay back the profit made between the actual market price and the FED target market price.

Means the hold until maturity make less money by magnitude(s) than the burning of treasuries. So, the burning can create hyperinflation, the hold until maturity only manipulate the yield curve, and doesn't let the treasury interest to grow higher than the target by the FED.

Very interesting.
Click to expand...

Yes burning Treasuries will lead to hyper inflation.

I need to add that for the $4.5 trillion in debt the Fed holds, $2.4 trillion are in treasuries, and the rest are notes issued by banks, local governments, corporations and other private and corporate entities, etc,. All these entities have to pay the Fed back, so this is not one pocket going to another pocket.
 
AssassinsMace

AssassinsMace

Lieutenant General
So Trump in a speech over the weekend said China puts a 25% on American cars exported to China while the US has a 0% tariff on Chinese cars exported to the US. Name one Chinese care sold in the US. The only thing that comes closest is Buick outsources an SUV to be made in China but no Chinese cars. Trump again has to lie about trade.
 
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LesAdieux

Junior Member
Anlsvrthng said:
Interesting.

If the FED buy the treasuries, the government pay the fed. The fed send back the profit to the government.
So if the treasury price is too low for the FED taste, then it just can increase the demand for it.

If the FED burn the treasuries then the government doesn't need to pay it back the PRINCIPAL to the FED, in the hold until maturity it doesn't need to pay back the profit made between the actual market price and the FED target market price.

Means the hold until maturity make less money by magnitude(s) than the burning of treasuries. So, the burning can create hyperinflation, the hold until maturity only manipulate the yield curve, and doesn't let the treasury interest to grow higher than the target by the FED.

Very interesting.
Click to expand...


oh, boy, you are a Genius with a huge brain! Trump should pay you a trillion for your tremendous idea!

how about China dumps the dollar as well? the US has little in FX reserve, they do have some gold, which can buy one tenth of China's reserve.

I put out a post back in April, I'll repost it here:


a scenario analysis on the China-US trade war, the financial front

in the tit for tat trade war, China will soon run out cards, so it may resort to its last weapon, the US treasury.

how much damage a sell down can do to the US financial market? actaully the impact is straight forward, because there's a one to one correspondence between the treasury price and the interest, interest is the inverse of bond price, that is:

1/P=R=1+r

China holds about 10% of the US treasury in circulation, if China dumps the treasury, a 20% nominal loss will push up the10-year treasury interest by 2%, and the 5-year interest by 4%, it's as simple as that. if America can stand a 2-4% interest hike in one go, that's Trump's business.

selling the treasury will get the dollar, that's no reason for China to swap one US paper for another, China will dump the dollar on the Forex market, that's the double-whammy.

the US cannot live without the international market, it need to raise a trillion every year to finance its deficit.

#436 LesAdieux, Apr 13, 2018
Last edited: Apr 13, 2018
 
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