Posted on 12/23/2022 5:40:35 AM PST by FarCenter
The Bank of Japan’s surprise policy tweak sent US government bonds down sharply, but US Treasury Secretary Janet Yellen probably hasn’t seen anything yet.
As the BOJ allows the yen to appreciate at long last, Yellen’s team may soon find itself short of buyers for US Treasuries in Asia and beyond.
As Japanese government bond yields rise, it will spark more selling of US Treasuries by Japanese institutional investors. As the dollar-to-yen trade gains momentum, more and more Japanese investors will redeploy their cash into the domestic bond market.
Yet Washington’s demand troubles could be far bigger than that.
Japan, after all, is the top holder of US government debt. China is No 2, followed by the UK and Belgium. If the BOJ is serious about stepping away from quantitative easing and tolerating a stronger yen, why would Tokyo buy sizable blocks of US Treasuries going forward?
Why, it follows, would China add to its dollar stockpiles given President Xi Jinping’s stated goal of internationalizing the yuan and accepting a rising currency? Why might the UK, Germany or US banks continue buying Treasuries given the fiscal trajectory of President Joe Biden’s economy?
At the same time, the Federal Reserve is engaged in its most aggressive tightening in nearly three decades: Washington’s debt load now exceeds a record US$31 trillion. Add to that the highest US inflation in 40 years amid speculation of a recession in 2023.
The need for increased fiscal stimulus to combat contraction would increase the US debt load. That, in turn, would further reduce the appeal of Washington’s IOUs. And the BOJ revamping its yield-curve control (YCC) policies could signal an inflection point spelling trouble for the globe’s most important debt market.
“Each incremental increase in the YCC band will be a bearish impulse for the US,” says strategist Ian Lyngen at BMO Capital Markets.
...
It follows, though, that Washington’s assumption that its bankers in Asia will always have its back needs revision. The US may have built a large and innovative economy on a hill, but Asia’s central banks hold the deed.
One way or another, I’m waiting for the whole system to come crashing down.
They don't want to buy paper that depreciates.................
We’re all in big trouble if we’re depending on that yellen dolt to fix anything.
I get the feeling every so-called leader in our government is a patsy and fall guy ready to be blamed when things go badly. From biden on down.
When the system comes crashing down, I intend to be a regional warlord. I want to decide who lives and who dies.
I don’t buy any of this cassandra talk.
what the world needs most is a weaker dollar. the weaker the better. why? because so much of international debt outside of the USA is denominated in dollars. the US debt is ugly. but international debt denominated in dollars is uglier.
what the USA needs most is a better trade balance. a weaker dollar makes that happen.
The US currency is turning into crypto currency. Fun while it lasted but eventually you have to pay the piper. With people like Biden and Peolsi in charge it’s just a matter of time.
The politicians turned social security into a ponzi scheme and now they have to bring in illegals to pay for it.
“Why, it follows, would China add to its dollar stockpiles given President Xi Jinping’s stated goal of internationalizing the yuan and accepting a rising currency? “
And what are they going to do with all the hundreds of billions of dollars they get for the stuff they sell us? Are they just going to put them under a mattress?
Because both China’s and Japan’s economies rely heavily on exports to us, they’re pretty much stuck with buying our bonds or some other dollar denominated asset.
As long as they keep taking dollars for their goods, they’re stuck and they know it.
“The Bank of Japan’s surprise policy tweak sent US government bonds down sharply,”
Gee, I must have missed that. What I noticed, instead, is that in the last few days treasury yields have been coming down, which means bonds have appreciated.
That’s acceptable, but I have already called being “Lord Humungus” on FR numerous times.
“because so much of international debt outside of the USA is denominated in dollars.”
You are thinking in flat-land—in a three dimensional world.
A weak US dollar will mean that countries will not want to continue to use it as the de facto reserve currency going forward.
You get to make the “weak dollar” move once—and only once.
Then watch out below....
false.
the value of the dollar over time has gone up and down.
The value of the dollar is not an absolute number. rather its a relative number.
the value of the dollar is relative to other currencies.
The value of the dollar is the best of a bunch of bad apples.
The way you know that this is true is that the value of gold denominated in other currencies has gone up much more than the vale of gold denominated in the US dollar.
the true thing is that the value of all fiat money as an assett class has declined
The problem today is that the US national debt has skyrocketed compared to national production (measured any way you wish to measure it).
If you play by the old rules you get crushed.
This is a straw in the wind telling us that the capacity of the Federal Reserve to fund America’s massive deficits and debt is drawing to a close. Further, it means that at some point in the near future the Fed will have to decide whether to hold to its present course and drive the country into a terribly serious recession or pivot, resume quantitative easing, and turn inflation loose.
See this in the context of the war in Ukraine:
https://freerepublic.com/focus/f-news/4118398/posts
>>And what are they going to do with all the hundreds of billions of dollars they get for the stuff they sell us?
China’s trade is close to balanced. They use the dollars from exports to the US to buy crude oil, ores, food, and other raw materials from other countries.
Where I got them will be of little importance.
I don’t disagree with your point that the national debt is likely unsustainable. That’s why the fed is inflating the dollar. a couple years of high inflation and the debt will be half of what it was in real terms.
to understand deeply what’s going on —from about 1980 to 2015 or so Gold was not considered to be a tier 1 assett. dollars and other currencies rather were considered to be tier 1 assets. basel accords changed that so that now gold is considered to be a tier one assett.
that’s the set up.
what happens next?
the central banks start to exchange devaluing paper assets for gold.
the last time that happened was from 2000-2010. central banks around the world bought gold as their currencies devalued. Gold prices tripled over a ten year period. when the central banks stopped buying gold in 2010—gold prices peaked and went into a 10 year decline and basing period.
most people expect gold to take off again when central bankers start to buy gold again to make up for their debased currencies.
that started last quarter.
expect a large balloon in the price of gold.
what’s the endgame?
imho gold will end up much higher than it is today. I don’t know as to whether that will be a 3x or a 10x. but imho gold will rise enough to make the central bankers reserves balance.
that is the value of the central bank gold reserves goes up and up as they exchange fiat currencies for real gold—thus driving up the price of gold.
at the same time inflation devalues the debt in fiat currency denominated assetts—which are still considered to be tier 1 assetts.
see how this works.
this will be a ten year period or so.
all this will have the effect of making most people poorer—especially in the west while keeping the system working and balanced.
On the back end of all this will be the price of energy—because that’s one of the primary drivers of inflation.imho there’s going to be a systemic decrease in the price of energy.
exactly how that works—I don’t know. but I’ve seen a lot of possibilities.
lowered energy costs—which also feeds into basic materials costs— are what makes the middle and lower classes whole.
And inflation is the easiest, and, I suppose, the most fair, or least unfair.
Either way, Katie, bar the door.
“China’s trade is close to balanced.”
Not even close.
This year China total trade surplus (vs the world) is almost a trillion (abut $800 bils).
Their trade surplus with the US is $338 bils for 2022 (through october)
So they’re getting a net 338 billion dollars from us alone just this year that they have to figure out what to do with.
But that’s not all, of the remaining roughly $400 billion in trade surplus they have with the rest of the world, most of it is paid in dollars (since it still is the most trusted reserve currency), which they have to figure out what to do with.
So, bottom line, even after it buys whatever it needs from other countries and pays it in dollars, it still ends up with over a half a trillion dollars each year that it has to figure out where to put it, and what it ends up doing with it is buy safe treasuries, though a relatively small amount goes to buy other assets - maybe real estate, stocks...
And the US has a trade deficit with just about every major countries of the world. So that’s more dollars sloshing around that those countries have to figure out what to do with.
The total US deficit with the rest of the world for this year will be about a trillion dollars!! All those dollars have to find a home, and treasuries are, so far, a safe haven to keep as reserves.
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