China Selling Treasuries
Might That Be Part Of the Administration's Plan?
I was listening to one of my favorite commentators on markets, and the subject of the tariffs naturally came up. He expressed a concern that China has holdings of U.S. Treasuries in the neighborhood of $1 trillion, and suggested that selling those Treasuries could be one form of retaliation in the trade war.
Let’s think about it. The Treasury does issue bonds, notes, and bills. Included are those with and without coupon payments, but still creating interest to pay outright or through discounts from face value. A dollar bill is essentially a “zero coupon” Treasury. None of it is convertible into anything real as was the case pre-1971.
If the Chinese do decide to sell, the Treasury would credit their accounts with dollars paying no interest. The Treasury gets $1 trillion off the books as well as $30-40 billion of annual payments. The Fed has created room on the balance sheet to accommodate such an event.
So the problem would be..???. Sounds like shooting oneself in the foot.
But ... three things:
1. Doesn't the government have to print more money to pay for the sale? I mean, I know that's just a speed bump, but this is a little different from the ordinary printing press operation since the money doesn't even get into circulation. Seems like it would be much more inflationary.
2. China would presumably immediately convert most of the dollars to some other currency, greatly increasing the supply of dollars in the currency market and making #1 even worse.
3. The US government has to find new buyers for bonds, which might be a little tricky when everyone is selling. Well, unless the plan is just to "issue" more of those "zero coupon" bonds, I guess, which of course makes #1 and #2 even worse . . .