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Japan surpasses China as largest foreign holder of US Treasurys (cnbc.com)
260 points by hker 61 days ago | hide | past | web | favorite | 136 comments



As I understand it, other countries' "belief in our debt" has little to do with their treasury holding levels. All countries that net export products to the US tend to end up owning T-bills proportionate to their export surplus. This is because their banks end up with a bunch of US-Dollar-denominated cash from exchanges by the exporting companies, and getting a return of even 1.5% (our 2-year interest rate) is better than 0% on cash.

The treasury level rising and falling is not usually intentional or by itself sinister, merely a byproduct of a fluctuating export surplus.

This article has a nice illustration of the process:

https://www.theatlantic.com/business/archive/2011/03/infogra...

https://www.theatlantic.com/business/archive/2011/03/infogra...


They can always sell dollars in foreign exchange for other currencies, local currencies or gold or bitcoin.

The reason they hold $ is a 'belief in our currency won't inflate' (by monetizing debt) which implies 'belief in our debt' If China is a net exporter to Argentina or Venezuela, rest assured they are selling those currencies as fast as they can


This wouldn't make any difference, it just means someone else now holds those same dollars. The existence of the dollars as an export surplus means someone is going to hold those treasries. At least until they are used to buy US exports - the only way bringing those dollars back domestically.

It goes further because it basically means a country is likely to be in deficit if these surplus dollars lay around somewhere - Twin Deficit Hypothesis.


Actually they don't even let them settle in their own currency. Almost all of the global trade happens in dollar or euro or yen. Even loans between countries happen in these currencies along with interest payments.


It's not a belief our currency won't inflate, it's a belief our currency won't inflate or lose value any more than other vehicles.

Note that even gold "inflates" through the production of gold mines - and gold miners produce more as the price of gold (in dollars or equivalents) rises so mining serves as a check on the relative value of gold.


Well sorta. In real terms, the price of gold is anchored to the amount of energy required to mine a kilo of gold with a sustainable margin. That quantity doesn't change very much (in real terms) over time.

Compare that to, say, American dollars, where we expect at some point (hopefully not in the next few decades) the government will lose its discipline and allow the dollar's value to drop to 0, its true marginal cost of production. My memory is the vast majority of governments have cracked on that score, sooner or later.

Really it reflects a belief in the as-observed-in-the-market marginal cost to produce, which is easier to think about than inflation. It also explains bitcoin and shows how important the large pool of mining power is.


> the government will lose its discipline

We don’t have to wait several decades for that. The dollar lost about 70% of its value since the ‘70’s. https://en.wikipedia.org/wiki/United_States_dollar


> the price of gold is anchored to the amount of energy required to mine a kilo of gold with a sustainable margin

This ignores subsidies and tariffs. Those factors dominate pricing over energy equivalence.


> That quantity doesn't change very much (in real terms) over time.

That may have been generally true for the last 6000 years, but I doubt it will be true over the next 100 years; once asteroid mining becomes remotely viable then the price of gold will plummet.


Remember, we were supposed to have flying cars in 2000. I'd bet against viable asteroid mining for the next few centuries...


This isn't a good comparison. The technological ability for us to have flying cars has long since been there - VTOL vehicles have existed for some time now. We could easily create drones that could carry people, etc.

But flying cars have never been practical because of the human element and the lack of physical constraints that could readily be placed on their control. Plus, people realized that as ugly as a highway is, sky highways are a hell of a lot worse. The idea became less and less popular, and now there's no real demand for anything of the sort.

There's plenty of demand for precious metals. And the technology for asteroid mining, even largely automated, already exists. It's a matter of driving the costs down enough to make if profitable, or waiting until supply drys up enough that even if the costs remain relatively stable that it will still make money.

We already see a lot of progress and promise in launch costs being driven down. There's ambition within these companies to expand farther and do more. The technology is getting to the point where there's little question on whether it will happen, barring some sort of extinction of modern society type event, it's just a matter of how soon.

I don't necessarily expect asteroid mining to happen on any large scale in my lifetime, but, I also wouldn't be surprised at all if it does. In 100-150 years? I'd be surprised if it hadn't.


If young people in India stopped buying gold jewelry and start selling the inherited one i doubt your anchor would survive.


> Well sorta. In real terms, the price of gold is anchored to the amount of energy required to mine a kilo of gold with a sustainable margin. That quantity doesn't change very much (in real terms) over time.

Could you explain more about why it is the amount of energy required that determines the price? That could get rather circular (what determines the price of energy).

A Marxist would say it is the quantity of labour power required; a classical economist would say it is the balance of supply and demand, but I haven't heard this one about energy.


I mean that in the fairly basic sense of mining gold being a physical process; so it uses energy.

The point is that it is possible to bring a practically unbounded amount of new dollars into the market at a cost-to-create of 0 (ie, in real terms, new dollars can be created for free) and cause inflation. Which is exactly what the central banks try to do except in a controlled manner.

Can't happen with gold, because the marginal cost of creating new gold is roughly the price of gold. The 1-2% increase in supply from mining isn't going to cause real inflation in gold that behaves anything like inflation in the dollar. Supply increases to meet demand, but the value that the gold represents does not change.

If someone finds a super-nugget the size of a cargo ship to mine that might change, but that isn't what the original point by joe_the_user was going to.


You've failed to explain your original premise, i.e. it is energy that determines the price of gold. You've made some tautological points that get us no where.


Some definite inflation to mean slipping value relative to a benchmark basket of goods, in which case I think gold has historically been deflationary.


Wish that article finished with why this is good or bad for America, what real effects it has..


I can tell you some reasons it's not bad.

You commonly hear about how we are indebted China or whoever and because of that, they wield power over us.

This isn't loan shark style debt. The US holds all the cards in this case. It's sort of like, the mantra, "if you owe the bank millions of dollars, it's your problem". If you owe them billions, it's their problem.

The US could even pay back that debt with money they themselves issued if needed.


"The US could even pay back that debt with money they themselves issued if needed."

Hyperinflation is effectively defaulting. No one will give credit to those who pay with Monopoly money.


You are naive.

Argentina is a serial defaulter, every decade or so it defaults on it's debt.

The next day creditors line up to give it money again.

It's hilarious.

https://ftalphaville.ft.com/2019/04/30/1556614127000/Why-inv...


Ish. They still have high inflation levels (which hurt the working classes), low economic activity, and struggle every day.

I agree that state-level credit dynamics are unique, but playing like they don’t matter at all typically lands one into trouble.


The problem (one of them) with Argentina is that they don't have industry, so simple like that. That's the trap where many countries are stuck.

Because in order to develop an industry you need investments and protection of the new industry until it's able to compete. Investment can't be only in your currency because you need to import things for the new industry. And protection is "discouraged" by those that are already developed (1).

(1)[pdf] - http://www.personal.ceu.hu/corliss/CDST_Course_Site/Readings...


The important thing about external debt is: is the debt denominated in your currency?

Because if you are Argentina (a country with little industry and exports) and you get a debt in Dollars in order to be able to import, of course you can get in the situation where you have to default your debt in a foreign denominated currency.


>The next day creditors line up to give it money again.

At what rate? In what currency?


The debt pays very high interest in argentina.


Are you sure issuing money to pay off debt leads to inflation? Citation needed. I assume you would cite the quantity theory of money [1], which says that "the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply."

Using the quantity theory of money as your model, how do you define the size of the money supply? Do you include or exclude government debt? It is a highly liquid financial asset, so maybe it should be included. Maybe not at par, but at some discount.

If it is included at par, then monetizing the debt (issuing new money and buying debt with it) [2] does not change the money supply. Here's the math: money supply is M + D (money + debt), and you monetize X dollars of debt, then the new money supply is (M + X) + (D - X), which is equal to M + D. Therefore, according to the model, we should not expect inflation.

Note that, in the US in the last 10 years, the Federal Reserve monetized trillions of dollars of debt [3]. Has there been hyperinflation, as you would claim?

[1] https://en.wikipedia.org/wiki/Quantity_theory_of_money

[2] https://en.wikipedia.org/wiki/Monetization#Debt_monetization

[3] https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1,_QE...


I forget where I read it, but I found it convincing, that printing money to pay debt to large investors does not cause significant inflation. The investors will not spend the cash on consumer goods, they will probably just loan it right back to you and the money remains locked up and not circulating in the economy. There ought to be nonzero inflation as a result, but only a tiny fraction as much as if the money were injected at the bottom where people are more likely to spend than save.


The idea that a government with control over its own currency can print money to pay debt without significant inflation is a part of Modern Monetary Theory. Here's a blog post explaining it: http://bilbo.economicoutlook.net/blog/?p=31715


Most (all of them?) episodes of hyperinflation, including the infamous Weimar Republic and Zimbabwe, are not caused by "printing" too much money, but by a fall in the productive capacity of the economy.

Here, Zimbabwe for hyperventilators:

http://bilbo.economicoutlook.net/blog/?p=3773


That’s misleading. Without creating an ever larger money supply hyper inflation can’t continue. Similarly, hyper inflation requires the state to continue to exist.

For example various currency’s have dropped so their only value is as a novelty item or physical object. But once it hits that point it’s value can’t continue to fall.


We are talking about causality here.

In my opinion, it's misleading to insist that the cause of hyperinflation is "printing" money and, never mention, that the real cause is the falling in the productive capacity of the economy.

For instance, the narrative about the Zimbabwe crisis is always the same: The government just went crazy and started to print money.

In my opinion, that's a totally dishonest narrative (and politically motivated maybe?), when what really happened is that they destroyed their main productive activity (agriculture).

>>"Similarly, hyper inflation requires the state to continue to exist."

Well, yes, of course, are you saying that the state stopping to exist would be a better alternative?


The drop in productive capacity is the motive, but not the means; the printing of the money is an action to prop up state finances with the direct effect of causing hyperinflation.

i.e. the Zimbabwe narrative should be: the government tried to dig itself out of a hole by printing money.

Similarly, the German government printed money in the 1920s to try to keep up with reparations payments which were larger than the economy could bear through taxation. (Though of course printing money is effectively a tax on savings, with the added effects of disruption to contracts.) And since the reparations were denominated in hard currency there were diminishing returns, as the government was printing ever-devaluing Papiermarks with which to buy Pounds Sterling and Francs.


>>"The drop in productive capacity is the motive, but not the means;"

Ok, I though we were talking about the final cause of inflation, not the mechanism, maybe you had something else in mind.

Now, if half of the productive economy disappear overnight, inflation is going to happen whatever the government do. You make it look like a government have an option in that situation.

If tomorrow morning half the fields and factories in the USA have magically disappear you will have inflation. In those circumstances, what sense would make to say that the "government is guilty because they printed too much money"?

Maybe you can tell me some example where something so catastrophic to the real productive economy happened like in Germany in the 20's or Zimbabwe and where inflation didn't happened.


Wars have destroyed huge swaths of a country’s infrastructure without creating hyper inflation.

Also of note hyperinflation does not occur with when the physical currency has high intrinsic value. Such as with the gold or silver standard meaning that any physical cause is insufficient on it’s own. Though a currency can and generally will be moved off of these standards in though economic situations.

So really the minimum requirements are fiat currency or a close equivalent allowing for significant money creation. Everything else is at best a trigger, but is not always repeated in every instance.


> Wars have destroyed huge swaths of a country’s infrastructure without creating hyper inflation.

It a morbid thought, but perhaps this is because such a war may lower demand a significant amount by killing or impoverishing sufficient numbers of people.


You have to distinguish between inflation (which every country has, on varying levels) and hyperinflation. Zimbabwe's inflation hit 89.7E63% per year. No, that is not a typo, it is actual powers of 10. In contrast, in Syria inflation is on the order of 20%/year, driven by real-world difficulties in importing and producing goods rather than a drastic expansion of the money supply. That is, when inflation is directly caused by disruptions to the economy, it's on the same order of magnitude as those disruptions.

In the German case, there was no massive damage to the economy; the war had been fought on the territories of France and Russia, and the only major disruption was a brief occupation of and general strike in the Rhineland, affecting maybe 10-20% of the German economy.

A last note: recessions are generally accompanied by deflation, though there the cause-and-effect relationship is complicated.


>>"You have to distinguish between inflation (which every country has, on varying levels) and hyperinflation. "

We agree. Inflation is caused by too much money chasing too few goods. That can happen because the money grows or the goods shrink. My point is that the historical episodes of hyperinflation are originated by the later.

>>"In the German case, there was no massive damage to the economy [..]"

From https://alphahistory.com/weimarrepublic/reparations/ :

"Berlin had failed to pay a £1 billion interim instalment, leading to the occupation of three industrial cities along the Rhine."

"In April the London meeting of the Commission fixed a final reparations figure of £6.6 billion. The reparations instalments were to be paid quarterly in gold or foreign exchange backed by gold, along with tradable commodities such as steel, raw iron or coal. Berlin was informed that any defaults on these payments would lead to the occupation of the industrial Ruhr region and the confiscation of raw materials and industrial equipment there. Though this revised amount was less than two-thirds the figure first proposed, it remained well beyond the capacity of the war-ravaged German economy"

I don't think hyperinflation could be avoided after that.


"War-ravaged" is a weird way for that site to describe an economy with its physical infrastructure entirely intact. The only main "drop" in productive capacity was the reparations payments and confiscations, which while harsh, didn't reduce the size of the German economy by a factor of a trillion (the total depreciation of the Mark from 1918 to 1924).

Inflation could have definitely been avoided by harsh taxation of the general population... but again, the government tried to dig itself out of the budgetary hole by printing money instead. (A budgetary hole exacerbated by the government promising to pay the salaries of workers on strike in the Rhineland.)


> Zimbabwe's inflation hit 89.7E63% per year. No, that is not a typo, it is actual powers of 10.

Yep, I keep Zimbabwe currency from around then as a reminder. I have a paper note for 1/2 a Zimbabwe dollar (aka 50 cents) and a few others printed less than two years later with amounts up to 100 TRILLION dollars.


The drop in productive capacity of the economy was much smaller than the drop in the value of their currency, so going crazy and destroying agriculture was responsible for the first part of inflation, but staying crazy and printing money was responsible for the most of it.


Can you support that with some data of citation?

I would recommend you to read the below link. It doesn't seem to me that the problem was "printing too much money".

From http://bilbo.economicoutlook.net/blog/?p=3773 :

-Unemployment rose to 80 per cent or more and many of those employed scratch around for a part-time living.

-45 per cent of the food output capacity was destroyed.

-In 2007, there was a 57 percent decline in export mineral shipments (see Financial Gazette for various reports etc).

-Manufacturing output fell by 29 per cent in 2005, 18 per cent in 2006 and 28 per cent in 2007. In 2007, only 18.9 per cent of Zimbabwe’s industrial capacity was being used. This reflected a range of things including raw material shortages. But overall, the manufacturers blamed the central bank for stalling their access to foreign exchange which is needed to buy imported raw materials etc. The Reserve Bank of Zimbabwe is using foreign reserves to import food. So you see the causality chain – trash your domestic food supply and then have to rely on imported food, which in turn, squeezes importers of raw materials who cannot get access to foreign exchange. So not only has the agricultural capacity been destroyed, what manufacturing capacity the economy had is being barely utilised.


585.84% [1] inflation in 2005 would correspond to (1-100/585)*100~=83% fall in economic output. Besides the main part of inflation was in 2008 - 79,600,000,000%, which could be explained by shrinking economics only if everyone except two people out of 14mln completely stopped producing anything.

[1] https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe#Inf...


>No one will give credit to those who pay with Monopoly money.

The creditors are also using Monopoly money.


Taking debt to pay back debt does not automatically lead to hyperinflation. The US federal government currently takes debt every year to pay off debt. That's sustainable so long as these payments stay a relatively small percentage of the total revenue. Unfortunately, as debt to GDP ratio continues to rise, if inflation drives interest rates to rise, things can get messy pretty quickly.


Yeah, that's why you don't want to do it(inflate debt away) but you can if you need to. It's never a bad thing to have a get out of jail free card on standby.


That's different. If the government prints money and spends it on goods and services in the economy to cause inflation, that would be 'inflating the debt away'. On the other hand if they print money solely to pay the debts, and they do not spend it on anything other than paying the debt, then that will not cause much inflation because the investors are most likely going to reinvest the money again, and it will not circulate in the economy. The result may not be much inflation at all.


There is >10x as much fed debt as M0 cash... it’ll cause inflation.


> The US could even pay back that debt with money they themselves issued if needed

Intergovernmental debt is a geopolitical concern. The U.S. could freeze interest payments and redemptions to China. It could place those holdings in receivership and pass a law granting those oppressed by Beijing damages from it.

With international debt, the debtor holds the cards.


> With international debt, the debtor holds the cards.

I think this sentence needs "if the debtor has equal or superior military capabilities". Some small country owing to the US certainly isn't in the same position.


Not true.

Please point to a case where US attacked a defaulting debtor.

You can't, because using the military against a defaulting debtor is against UN law.


> Please point to a case where US attacked a defaulting debtor

Gunboat diplomacy [1] features vibrantly in history. "The Venezuelan crisis of 1902–03," for example, "was a naval blockade imposed against Venezuela by the United Kingdom, Germany and Italy from December 1902 to February 1903, after President Cipriano Castro refused to pay foreign debts and damages suffered by European citizens in recent Venezuelan civil wars" [2].

Broadly speaking, the UN provides guidelines--not actual limits--to the anarchy that is geopolitics.

[1] https://en.wikipedia.org/wiki/Gunboat_diplomacy

[2] https://en.wikipedia.org/wiki/Venezuelan_crisis_of_1902–1903


You shouldn't put words into my mouth. A military intervention is always on the table - what pretense you use is a different question. That the US has been very liberal with the pretenses in the recent decades is well documented.

The fact of the matter is that military strength is what -internationally- decides who holds the cards.


Not in matters of debt.

Just look at how EU was forced to erase more than 50% of Greece's debt.

Or look at how US hedge funds are still fighting Argentina (in court) to recoup some of the money. According to your logic US should have threatened Argentina by now.


> Just look at how EU was forced to erase more than 50% of Greece's debt.

Greece is a member of the EU.

> Or look at how US hedge funds are still fighting Argentina (in court) to recoup some of the money.

Private interests aren't the nation's interests, until they are large enough or invest enough money into PR, see United Fruit Company.

It also doesn't mean that any and all questions of international diplomacy will be handled by the military. But if push comes to shove, and the country with the far superior military isn't happy with the conditions of the default (or nationalization, or annexation, or... anything, really), they tend to come down not to international contracts, the UN, or ethics, but to military strength. Consider the situation in Ukraine for a well-documented example that certainly would have played out very differently, were Ukraine and Russia similar in military strength (that is in this case: if Ukraine still was a nuclear power).


The Ukraine situation has nothing to do with debt.

Show me an after WW2 example were one country used the military against another because of unpaid debt.


You could consider Iran a case. Iran decided that it wanted to "default" on "buying" BP & co.'s assets.


That's an overly simplistic analysis.

>>If you owe them billions, it's their problem.

It is also entirely possible that if the US decides to actually make this (say) China's problem by overtly refusing to pay back the debt, everyone else who holds US Treasuries would start dumping them, driving demand lower and lower until both (US and China) the giant economies come crashing down.

That is, this may not a zero sum game. By which I mean, both countries could lose (and also end up taking the entire world economy down with them for at least a while).


One does not follow from the other. Your explanation would only make sense if the only two choices are keep cash or buy US debt.

Of course their holdings have to do with their belief in US debt, those dollars could be spent on many things.


You have to be careful about that sentence. The only other options is to sell $ for another currency.

Anything that they buy things that are denominated in $ are usually US imports hence goes back to the net export calculation.

Of course they can also use to buy global commodities like Gold, Oil which are denominated in $$, but that is just a proxy for selling $ in foreign exchange and using that currency.

So, logically only 2 options. Sell US $ in FX or buy US assets (Bonds, Stocks, Real Estate)


Exactly right. Also you need to think about the sheer amount of dollars that China and Japan have. There are only so many investments that can give you a return on 1 trillion dollars without significantly adding to the risk of losing the principal. Treasury bills are essentially no more risky than the cash that you trade for them.


Soon you'll have the option to choose the currency of choice for your savings account (Cryptocurrencies included)


I have that with my trading account but I can't see banks offering that as standard. There's too much risk to open this widely.


Near as I can tell, and I’ve checked on this infrequently over the past few years, Japan’s holding of US debt have always been within spitting distance of China’s, where spitting distance is a few hundred billion give or take. So the news in itself isn’t surprising.

That is to say, I think it would be a mistake to read much into this. The largest share of Federal debt is held domestically, really the lion’s share. China and Japan are generally within the trillion dollar range, and are always #1 and #2 foreign holders of US debt.


To my knowledge China has intentionally be reducing its holding of US treasuries as part of the ongoing trade... kerfuffle. Yes, China and Japan are usually close, but this delta was closed not because Japan bought more T-bills but because China sold theirs off over the last few months, and is continuing to do so. They're down to the lowest level of holdings since 2017. [1,2,3]

To your point the majority is held domestically but this does create pressure on the instruments at the margins and raises the cost of borrowing both now and over time. Some of that is being masked now by the flight of capital to safety, particularly domestically, over concerns of the same recession.

Less buyers of T-bills raises interest rates, which in turn raises the cost of borrowing money, which in turn pushes down equities. I doubt the Chinese could sell off their T-bills any faster without risking de-valuing their holdings. With that said, I doubt their holdings go up until this trade war ends, if ever, and this will prove problematic once the dust settles. A worst-case scenario for the US is higher interest rates [wiping out current bond investors] combined with lower equities [wiping out current stock investors]. This yields inflation and removes the levers of economic control from the federal reserve -- it could be devastating.

[1] (May) https://www.bloomberg.com/news/articles/2019-05-15/china-s-u...

[2] (June) https://www.bloomberg.com/news/articles/2019-06-17/china-cut...

[3] (July) https://www.scmp.com/business/companies/article/3018924/chin...


I believe China has less money to buy Treasury's because they need to use the dollars.

The One Belt One Road contractors that are not Chinese want dollars. https://www.economist.com/business/2017/08/03/western-firms-...

They are using dollars to pay down dollar denominated debt.

https://www.axios.com/china-business-debt-trade-war-yuan-dol...

China’s Banks Are Running Out of Dollars

https://www.wsj.com/articles/chinas-banks-are-running-out-of...

But to contradict myself China has been buying a lot of gold https://markets.businessinsider.com/commodities/news/china-b.... But if they are buying it from Russia then they are probably partly paying in Yuan.


> raises the cost of borrowing

Long-term interest rates are lower now than in recorded history.

> flight of capital to safety, particularly domestically

Is there any evidence that domestic demand is stronger than foreign demand?

> over concerns of the same recession

Europe is much closer to recession than the US. Maybe they're the marginal buyers of US bonds and driving down rates?

German manufacturing just fell off a cliff. European banks are in crisis. European bonds have negative rates from 3 months to 30 years, while US bonds still have a positive yield. The dollar is strengthening.

> A worst-case scenario for the US is higher interest rates

This is a bizarre conclusion given dramatic and relentless reductions in US rates, and negative rates in Europe and Japan.

I'd say the worst-case scenario is if rates go negative in the US and policymakers lose the ability to stimulate in response to recession. Zero and negative rates push the pension crisis into catastrophe. Then US and global economies turn deflationary at the same time. Very difficult problem to fix.


>Europe is much closer to recession than the US. Maybe they're the marginal buyers of US bonds and driving down rates?

Makes sense, since the majority of their debt now has negative yields.


> This is a bizarre conclusion given dramatic and relentless reductions in US rates

It's based on past scenarios that have little to do with the current scenario. A common mistake even among economists. X thing happened in the 1960s or 1970s, therefore it will happen now. Their dogma is the same reason they are nearly all baffled by the lack of wage growth, productivity increases, dynamism, etc. in the economy.

There is no scenario where the US experiences rampant inflation (traditional consumer inflation) and soaring interest rates. The only guaranteed bet in fact, is on low interest rates 'forever' (or until default).

$35 trillion in debt * 3% = hahaha, very funny, stop kidding around!

Take the Japan scenario to the bank. The Fed is going to do everything in its power to pursue that route, as it's the only one left (short of the miracle of spending cuts with tax increases and spending locked to ~1% annual growth).


> A worst-case scenario for the US is higher interest rates [wiping out current bond investors] combined with lower equities [wiping out current stock investors]. This yields inflation and removes the levers of economic control from the federal reserve -- it could be devastating.

I think "wiping out" is grossly overstated, but setting that aside... why do you think this yields inflation and removes the levers of economic control from the federal reserve?

I have the opposite conclusion, but I'm not sure.

It seems to me that if rates are higher and stocks are lower, that should make both of those more appealing investments, which would cause more dollars to flow into financial assets. Which would continue the existing trend whereby the financial world soaks up the excess dollars and very little of it gets into the "real economy" where it would increase wages of workers and cause inflation.


How long are these debt/bond terms usually? Would Japans large 80s boom still be playing a role in their debt ownership or is it all new debt that they keep buying?


T-bonds are a maximum of 30 years, so no. There could be a few months left where they could potentially be holding from 1989, but not a major component.


I believe the real reason why China is no longer the largest holder is that, China SPENDS tons of dollars she earns/holds on one-belt-one-road projects. US and western countries are super unhappy about that, as China effectively de-weaponize dollars. China is supposed to earn/hold US paper money and never to spend it. Just my 2cents.


Owning a piece of infrastructure definitely seems more valuable than owning a foreign government bond. But I don’t see how this “de-weaponizes” the US Dollar.


Most U.S Treasuries are held by American citizens, it's why fiscal hawks are always ranting that defecit spending "bankrupts our kids", foreign holdings are insignificant in the grand scheme, and as noted the largest holders are all allies.


What does this have to do with anything? The problem with too much US debt is that we have to make interest payments on that debt, which now makes up ~10% of the annual budget (or about $400B/yr). That's expensive and going to get worse if we continue borrowing at unsustainable rates. It's also going to get a lot worse if investors start to worry the US might default on its debts and demand higher yields on return.

I'm not sure why you think it matters whether China or Europe is holding the debt.


> What does this have to do with anything? The problem with too much US debt is that we have to make interest payments on that debt, which now makes up ~10% of the annual budget (or about $400B/yr).

That may matter to you as an individual but governments get to print money. It's like if I issued IOUs denominated in Steve's Funbucks that I'm the sole issuer of, and those IOU holders lived across the ocean and also I had half the world's armed forces at my disposal. Then when things went sideways I fired up the Epson and paid you off. As it turns out inflation is not directly connected to the issuance of new money, although it does contribute. Balancing a federal checkbook isn't the same as your home finances.

I'm not saying you should go to town and print a ton of money and that nothing would happen, I'm saying it can play a role and isn't directly equatable to small-scale finance.

(Edit) further, borrowing to create economic activity is not zero sum. If you borrow 100K and create a business worth $1M, and reap the tax returns, it doesn’t matter how much you owe. If I borrow $1T and create a $5T economy, I doubt the kids will mind. This is in part why the money supply increases over time — to reflect the new scope of the economy.

The only material risk of taking on debt is that you need to create returns in excess of your interest payments.


It seems to me that "half the world's armed forces" is a result of being able to print money, not a cause.


Chicken or the egg right? Pre WWII we were hit with a massive depression like everyone else. As the war effort ramped up and the rest of the industrialized world was taking it on the chin we conveniently got to reap the economic benefits of having a totally mobilized workforce, without, y'know, all our manufacturing hubs getting Dresden'd. Surprise suprise, we win the war and don't incur heavy infrastructure damage AND get the benefit of a suddenly energized economy, so we do what we do and keep the party going. Stick our noses in Korea, get in a massive arms race with the Soviet Union, fight a couple proxy wars with the Soviets. Well turns out the Soviets are light weights and can't hold their liquor and bow out early. Now we're the only ones with a ginormous army and can subsequently print our own money. We got away with it because everyone that we kept close were highly incentivized not to call us on it, on account of the soviet's nasty habit of rollin up to a place and makin it the quality of life equivalent of an Andy Dick comedy special.


Andy Dick got clocked by some random guy on Bourbon St the other day who calmly picked up his water bottle he’d put down on the way out - a clear sign of SVR training


That could absolutely be true, but what difference does it make? I’m asking genuinely. To me that’s the how we got here, not what we do next.


Why should the US be borrowing for economic activity? What business does a government have choosing winners in the marketplace. The US already has one of the most efficient capital markets in the world.

The government should on being the best administrator of markets possible. They should never be taking part unless there's a ton of evidence it'd be the best option compared to alternatives or simply a moral obligation, like health care and (more so in the past, before parcels) the postal service.

Otherwise they need to go away and focus on bettering and updating the regulatory and tax regime. Not "bringing jobs" or generating economic activity, or w/e else via directly putting money and management themselves. The former is the only way they can really improve the economy. By letting the millions of highly capable do what they are already doing, while efficiently dealing with externalities that the markets and courts can't handle.


To be clear your question turns an Econ question into a poly sic one.

It’s well worth asking but it is a completely different domain. From an Econ perspective this is pretty clear. Borrowing when things are cheap is more efficient than when they are expensive.

Also as a side note, you present lots of opinions as facts in your argument (even if they are opinions I might find agreeable).


Your argument has nothing to do with borrowing. The same “choosing winners in the marketplace” argument can be made for government spending money it raised as taxes. Whether the money the government uses to “choose winners” came from taxes raised, or property sold, or fines levied, in the past or in the future, has little to do with the question of whether governments should spend money and “choose winners”.


> That may matter to you as an individual but governments get to print money.

No, governments (unless Zimbabwean) don’t get to print money. They get to borrow money, and pay back previous loans with newly borrowed money.


>No, governments (unless Zimbabwean) don’t get to print money.

Well, this is patently false on its head. The Treasury Department and Federal Reserve certainly print money.

>They get to borrow money, and pay back previous loans with newly borrowed money.

What? Money has to come from somewhere - you can't borrow a thing that has to be produced if no one can produce it. When you hear comments like "The world economy grew 3.1% in 2018" that's measuring monetary output - for it to grow new money plainly has to be created

You don't physically print much money these days, but what the US Federal Reserve, and other similar central banking systems in other countries do, is draft new liquefiable accounts (US Treasuries are a popular one and in line with the current discussion) that then adds them to existing reserves that the other banks have with the Fed - if the Fed buys a bond from a bank, it just credits the payment to the reserves that bank has at the Fed - it does not debit an equal amount from elsewhere. Then the banks themselves continue to print money - they only need to keep 10% of their deposits in reserve and can lend out the other 90%, of which ends up in other banks as deposits, which then only need to get 10% of that value, and can lend out the rest, etc. So if the Federal Reserve creates $100B in new assets and loans them out, the nominal monetary increase in the economy could be as high as $1T.

One of the fundamental pillars of the modern world economy is the fact that both central reserve banks and regular banks can print money. Without this the world economy looks almost entirely different.


> As it turns out inflation is not directly connected to the issuance of new money, although it does contribute

Are you saying that because of QE? If so I don't buy it. QE is an ongoing experiment. We'll see.


It depends on where the newly issued money goes. Newly created money being used to purchase financial instruments (e.g. corporate bonds) has no reason to cause inflation. Quite the opposite, actually (increased investment increases productivity and decreases prices). Which is exactly what we’ve been seeing for the past decades (speaking long term).


You don't seem to understand that if a broke USA can't pay its debts, its biggest problems aren't getting invaded militarily but economic. Even if it defaults on foreign debt, a) new debt is going to be insanely expensive which is bad in the long-term; b) to avoid defaulting on domestic debt (and likely destroying the domestic economy in doing so), taxes would have to go through the roof... which would also be like taking a wrecking ball to economic growth.

Interest on the debt in 2019 is equal to about 60% of the much maligned defense budget, to put it in different terms.

Re: return on debt, that's really not a strong argument when you consider where the budget actually goes. About 75% of the 2019 budget goes to entitlements (of which the majority goes to retired persons who receive more in benefits than they ever paid in) and military, neither of which really seems like they're going to bring in significant returns to justify the debt.

Sure, there are probably some programs where this argument makes sense but my impression is that most large-spending proposals from progressives are more motivated by lofty idealism designed to motivate the voting base than policies where the cost of debt vs ROI is being carefully considered.

That said, irresponsible spending on Washington is definitely a bipartisan sport these days. And as an incumbent politician, why not? You reap the electoral benefits of lavish spending on the voting public, and neither you nor voters in general care much to think any longer-term than the next election cycle.


>>"to avoid defaulting on domestic debt "

Logic tell us that there is not reason whatsoever for the only issuer of dollars defaulting in a debt denominated in dollars.

Alan Greenspan (ex-chairman of the federal reserve) will confirm it (video):

https://www.youtube.com/watch?v=q6vi528gseA


Yeah it's not physically possible when you control its issue and redemption. It's like American Airlines defaulting on it's AAdvantage miles.


The effects of hyperinflating away the debt aren't really much better


> if investors start to worry the US might default on its debts

If investors are willing to lend to the US for 30 years at 2%, doesn't seem like they see much risk of default.


We were lending at 5% to people with no income right before the 2008 financial crisis too.


If the alternative is getting 0% yield on USD, why wouldn’t they trade the USD for a bond?

And before you say “just buy EUR/gold/stocks” that just means someone else (the seller of EUR/stocks/gold) would now be in the above situation.

Buying US Treasuries for USD has little to do with absolute risk of the bond, and everything to do with the non-existence difference in risk between the bond (US Treasury) and the currency (USD) it’s denominated in.


>What does this have to do with anything? The problem with too much US debt is that we have to make interest payments on that debt, which now makes up ~10% of the annual budget

Where are those debt repayments going? The majority go to US citizens. That's the point. Government debt are assets (read: wealth) to the owners of the bond.

It's astonishing to me how many times people fail to look at both sides of an economic transaction. It's like Ray Dalio talking about China weaponizing their treasury holdings yesterday. Yeah, China is going to "hurt" the US by selling bonds it bought for $1000 to someone else for $700. Who does that hurt again? Not the US; the debt repayment remains the same, no matter the holder.

>It's also going to get a lot worse if investors start to worry the US might default on its debts and demand higher yields on return.

You're missing a part of the logic here: interest rates are low because there is high demand for these instruments. It's easy to talk about some hypothetical scenario where people "demand" higher returns[1], but in reality, people the world over are lining up for US debt and many other investments that pay far less than treasuries (speculative equity, for example). Creditors don't get to choose their returns; they are at the mercy of those putting the capital to work.

[1] I'm sure you, as do I, want higher returns right now. How do you intend to demand this?


The entire point of the United States is protecting the dollar as the defacto currency for the world's trade. As long as that holds true the amount of created money is largely integers on a screen that get added and subtracted with little consequence.

So far.


The alternative is to use public private partnerships for doing projects. The costs are higher interest rates that companies have to pay for getting a loan and having a part of the project money set aside for the profit of the companies.


If negative rates hit the U.S., wouldn't that further incentivize the government to issue debt, since investors would be paying the government for the privilege to hold their money?


Not only would it incentivize the government to issue debt, it would also incentivize basementcat to also borrow lots and lots of money (assuming I can get 0% interest rate)


A friend may work with you to negotiate terms, even at their own expense. A rival may use it against you in pursuit of their own benefit.


That's pretty funny, since a trivial analysis of the flows of real goods and services will show that your kids are going to almost entirely consume the real goods and services that they produce.

No, what excessive deficit spending does is generate an excess of financial assets that lay claim to the same pile of goods and services. This makes the financial assets less valuable, reducing the ability for current savers to trade their assets for today's real goods and services. This is through a combination of an increase in interest rates (reducing the value of bonds) or through outright inflation.

Another way of thinking about it: the supply of real goods and services is relatively fixed, so what happens when the government consumes more today? Somehow this needs to reduce the real goods and services consumed by society, and that can only happen in a few ways: involuntarily through taxation, involuntarily through loss of purchasing power due to inflation, or voluntarily through selling more attractive financial assets.


The supply of real goods is anything but fixed.

On my side, I have evidence like the global population doubling while poverty plummeted.

There's still lots of people without enough to eat, but 30 or 40 years ago was a completely different story, it was much worse.


Fixed, in the short run, with respect to money, while there is sufficient money in the economy.


Part of the argument of Keynes was observing that supply is not at all fixed, there is idle capacity - unemployed people and idle physical capital. Production can be increased without inflation up until "full employment" is reached.


The curve of money supply versus output is flat at the "way too much money" end of it. If there isn't enough money then obviously you fix the problem - but this isn't where the deficit hawks are usually worried about debt.


Wikipedia has foreign holdings at 28% and growing as of 2008 [1]. That’s enough for bargaining leverage in many situations.

[1] https://en.wikipedia.org/wiki/National_debt_of_the_United_St...


If the entire world pooled their holdings, yeah, sure.


1 The prospect of a default will tend to align incentives across all debt-holders.

2 Of the foreign debt, Japan + China hold the lion’s share at about 40%, so definitely worry if you ever see those two aligning against us. It will be important for the US not to piss off Japan.


Wake me up when they pool their armies.


Which situations?


Estimated Ownership of U.S. Treasury Securities (From Fed Bulletin)

$22T - Total Federal securities outstanding

$9T - Federal Reserve and Government accounts + State and local governments including pension funds

$2T - Mutual funds

$2T - Depository institutions, private pension funds, insurance companies.

$3T - Other domestic investors. Includes individuals, Government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors

$6T - Foreign and international


Treasurys? Is that a valid spelling? I always assumed it was treasuries.But I'm assuming they didn't forget to prrof the headline?



It’s a proper noun. Treasurys are lots of bonds. One with treasuries has, I don’t know, chests of silver?


I am not familiar with Treasuries, I'd appreciate some insight into what this means "China has been a less aggressive buyer of the U.S. sovereign debt". How is it possible to "hold" (buy) another country's debt?


I'll give you the geek-friendly oversimplified version:

The U.S. government issues several varieties of securities, informally referred to as "Treasuries." Substantially anyone can own one; you can buy one directly from the US yourself (treasurydirect.com) or from any of a host of financial institutions, which both hold them for their own account and resell them routinely.

Because the US is so central to the international economy and so good a credit risk, there is an active market and infrastructure for holding Treasuries substantially everywhere. How good credit is the US government? Well, for a variety of purposes it is useful to have the notion of a "risk-free rate of return", and whatever the US is paying on treasuries is assumed to be that rate. (This is assumed to be risk-free because the US knows that default on treasuries would be cataclysmic and would do anything to stop it, and one of their options is creating more money and using it to repay treasuries as they come do, which has consequences but is not a default.)

Governments routinely hold debt securities of each other. This gets complicated, because the thing you think of as "the Japanese government" is both a) distinct from other things you might think of when you think of Japan and b) actually comprised of thousands of units that could in principle beneficially own a treasury, but the overwhelmingly most likely one by dollar weighting is the Bank of Japan as opposed to e.g. Ogaki City Hall (which could purchase a treasury on any Tuesday from anyone presently owning them, which includes every financial institution Ogaki City Hall has an account with).

The Bank of Japan does not purchase most of its Treasuries on the secondary market; they get originally issued Treasuries at auction. The Treasury runs auctions regularly: https://www.treasury.gov/resource-center/data-chart-center/q... Governments and very large financial institutions, the kind which make transactions denominated in billions of dollars, participate in the auction; the Treasury awards the newly created securities to the bidders with the most competitive (cheapest for the US) bids.

After the securities are issued and released onto the market via the auction, they are tradeable. The secondary market (technically, MANY secondary markets) for treasuries is the most liquid market for any security in the world. Large institutions, small institutions, etc etc buy and sell billions all day every day.

As it gets farther from J.P. Morgan Chase and closer to e.g. individual HNers, it is more likely that a retail investor is purchasing a Treasury either not-terribly-competitively from whomever they hold an account with and/or they're purchasing financial services from an intermediary who owns a lot of treasuries themselves either directly on the behalf of their account holders or indirectly. For example, a mutual fund could easily have hundreds of millions (all beneficially owned by fund holders), or a bank might be paying interest on their checking accounts while keeping a substantial amount of treasuries on the bank's own account. (The checking account holder doesn't have direct exposure to the treasuries.)

Make sense?


Now do the yield curve!

Seriously though, that was a great explanation.


Not an expert, but I believe it means that the country owes you money, to be paid back on some schedule, and in particular you can re-sell the object-that-says-you're-owed-money to other people and therefore there is a market value for it. It's like holding a mortgage - if I get a mortgage on a house, I owe the value of the mortgage to my bank, but only slowly. My bank can then resell the mortgage to another bank, who becomes the holder of the mortgage. They're owed money by me, which is good if they think I'm creditworthy and the interest rate on the mortgage is profitable for them, and bad if not. You might want to sell a debt to someone else if you want some fixed amount of money now instead of a greater, probably riskier amount of money in the future.


The U.S. govt. holds a sale of treasuries every so often and people/entities buy them. Nothing special about it. They're high quality and liquid assets so they can be frequently found in many investment portoflios and balance sheets (essentially as good as cash).


You can point your browser to treasurydirect.gov sign up and transfer some funds and hold your own little piece of USA government debt!


"China has been a less aggressive buyer of the U.S. sovereign debt"

It means China is dumping US debt. Which will mean a surge in interest rates, a weaker US dollar, and in a nightmare scenario, hyperinflation.


> It means China is dumping US debt. Which will mean a surge in interest rates, a weaker US dollar, and in a nightmare scenario, hyperinflation.

But then again, the popular wisdom seems to be that a weak currency supports exports. So I don't know that this is clearly a bad thing. Hyperinflation I would peg to be usually caused by a break down of the domestic market.


A weak currency means more exports but higher import prices. Add the additional tariff coming soon means anything from China will get more expensive. Perhaps this forces Trump to drop them.. it could backfire and create a local industry that will compete against China.


If you believe Trump, then the creation of a tarrif-protected local industry would constitute "front-firing."


The article states China’s holdings are still increasing, the opposite of dumping. Japan is simply increasing faster.


Wouldn’t that deeply hurt the Chinese economy as their boost from their currency inflation goes away


Free markets mean any market participant can buy anything. Just like you log on to Robinhood and buy stocks or bonds, one of those users is the Government of Japan.

This is really only slightly simplified as they wouldn't use Robinhood, but they could. Convenience improvements work for all market participants.

Synonyms to save you time understanding this market:

Government bonds = sovereign debt = (when US federal bonds are the context) US treasuries aka US treasury bonds

Fixed income = the market of bonds = credit markets

Junk = not "investment grade" bonds = high yield, but doesn't mean "junk, bad investments"


They are small players compared to the Social Security Trust Fund and the Federal Reserve Quantitative Easement holdings. Both of those total six times Japan or China.


China seems to be having a huge capital flight. It has just removed the peg on their currency price, what is a large giveaway. It's perfectly natural that foreign currency reserves stop increasing or even decrease.


People who are more in the know - is this likely to be part of a long-term trend or is this a short term reaction to recent US-China relations?


Headline should be "Treasuries". What the heck, CNBC. You're a financial network. You can't spell "treasuries"?


https://www.cnbc.com/id/32462271

>The short answer is that the "misspelling" is on purpose, done to differentiate Treasury bonds from the plural for the Department of Treasury, though I'm not sure why you'd ever need to pluralize that. In any event, a number of business news organizations, including CNBC, use the "Treasurys" spelling.


That makes no sense at all. There is no plural for the "Department of [sic] Treasury", which, btw, is called the Department of THE Treasury.

So if it's done on purpose, that's even more idiotic.


Colloquially known as the US Treasury, which could conceivably be pluralized as Treasuries.

Some other reasons for the alternative spelling:

In many style guides, proper nouns ending in -y are pluralized as -ys, not as -ies. For example, Casey plural would be Caseys, not Casies. Treasury, referring to the type of institution is not on its own a proper noun, but "Treasury", the name of the security emitted by the US Treasury, might be.

Another reason for the alternative spelling is in financial settings, the plural of Treasury (notes, bonds, etc.) is abbreviated as Tsys. Treasurys is a reasonable "backronym" for that.


"Might be"? Yes, I suppose.

Is? No.

"treasuries" is the long-accepted spelling here.


Seems like they are in step with the times.

Brawndo: it's what plants crave.




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