Monday, July 30, 2018

It's clobberin' time

This is it. Prepare for the wallop.
The Russian government has sold off the vast majority of its holdings of US Treasury securities for reasons that remain mysterious, in a dramatic move that experts are calling unprecedented.

A US Treasury report released on July 18 shows that Russian holdings of Treasury securities declined by 84 per cent between March and May, down to just $14.9 billion from March holdings of $96.1 billion.
Some are speculating that Russia was reacting to US sanctions, in a possible preemptive move to divest assets before they could be seized.
Is that it? I don't think so.
It's also possibly that Russia has moved its Treasury holdings offshore, wrote Bloomberg columnist Brian Chappatta, noting that the Cayman Islands' holdings are up $20 billion over the past two months.
The numbers don't add up. $96 billion is substantially more than $20 billion.
The third possibility is that Russia predicted a move in the market, and hoped to take advantage. If so, such a market move has yet to materialize.
But why did they predict a move? What's happening? The amount of money is not huge when compared to (say) China's investment. But the rapidity of this move is bizarre.

The most optimistic theory would be that Russia knows that Mueller has damning information about Donnie. The process of ousting a president could cause this country to go through a period of stress and instability.

A less optimistic but much more plausible theory is that Russia foresees instability as a result of a looming trade war with China. That scenario is the basis of this article in Sputnik.
US securities and the dollar, the latter serving as the de facto global currency, are currently considered to be among the most dependable high liquidity assets in the world. However, in an era of global economic instability stemming from geopolitical crises and fears of a global trade war, precious metals are seen as instruments providing security and a diversification of risk.

With total global unsecured debt hitting some $247 trillion (or 318 percent of global GDP) in June, gold is seen by many economists as a reliable store of value which, while also subject to fluctuations, cannot be drastically depreciated, or suffer an artificial collapse. The same cannot be said of treasuries (American or otherwise), which can collapse in value if a large debt holder were to suddenly dump its holdings.

Speaking to Sputnik, Alexander Egorov, a currency strategist at TeleTrade, a Russian broker, outlined the risks associated with US securities.

"If for one reason or another a group of states were to present their Treasury holdings to the US for payment, they would simply become worthless. This is a pyramid, because the US, by all appearances, will never repay its debt. This scheme will continue to work so long as it is believed in," Egorov said.
I can't resist pointing out that Russia is now pretty much a fascist nation. For reasons that have always escaped me, fascists and conspiracy buffs are often huge gold bugs. At least, that's been the tendency in this country during the past forty years or so; I don't know if the fascists in other nations share this gold mania.

Asia Times asked a week ago "Will China be next?"  If China and Japan start to move out of US Treasuries, things could get very serious very fast; both countries have invested more than a trillion dollars. (To put things in perspective, the entire Treasury market is about $15 trillion.) The above-linked article quotes this post by Brad W. Setzer of the CFR, who posits that a US-China trade war could result in China selling US securities.
On the surface, it looks like the U.S. is extraordinarily vulnerable. The stock of Treasuries that the market has to absorb to fund the rising U.S. fiscal deficit is objectively quite large, as the U.S. has ramped up issuance while the Fed is reducing its Treasury holdings.

And if China started to sell, the amount of U.S. paper that non-Chinese investors would need to absorb would be extremely large (Cole and I assumed about $200b in quarterly sales by China, i.e. the most they sold in a 3-month period between 2015 and 2016/ chart here)—or sales of around $850 billion (over 4% of U.S. GDP) in a year. Under these assumptions, it would take China a year and half to unload its Treasury portfolio. And, for that time, the U.S. then would need to place around $2 trillion a year with non-Chinese investors.
Ultimately, says Seltzer, a Chinese sell-off would be bearable:
Treasuries sales in a sense are easy to counter, as the Fed is very comfortable buying and selling Treasuries for its own account. I have often said that the U.S. ultimately holds the high cards here: the Fed is the one actor in the world that can buy more than China can ever sell.
Despite being a notorious pessimist, I don't predict a massive sell-off of Treasuries, because I don't think that China has any motive to see the US go down the tubes, economically speaking. Russia does.

A word about the Kochs: I hate 'em, you hate 'em, every liberal hates 'em. But they're making some very strange noises now about supporting Dems who oppose Trump's trade policies.

Steve Bannon, being his characteristically dickish self, told the Kochs "Shut up and get with the program." That kind of talk may work on guys like Paul Ryan, but...the Kochs? Such words will probably have the opposite of the intended effect.

Nobody running for office would ever ask for my advice, but if someone did, I'd go into Machiavelli mode. Tell the Kochs whatever they want to hear (at least on trade) and take the money.

The point is to win. We need a proper investigation of Trump in Congress; nothing else matters. We can't rely on Mueller. If attaining a Dem majority requires dealing with the devil, so be it.

As I said a couple of posts down, verbiage is not governance; telling the Kochs what they want to hear is not the same thing as doing what they want done. Truth is, there are certain issues where liberals and libertarians can find common ground. Immigration is one; war is another. Opposition to Trump on trade is still another.


gadfly said...

From The South China Morning Post comes Putin's answer to the dumping of US Treasuries:

Putin said Russia has no plans to reject the US dollar, even though Washington has undermined trust in its currency by using it as an argument in political disputes.

“Russia isn’t abandoning the dollar,” Putin said in answer to a question about the sharp decline in its holdings of US Treasuries in April and May. “We need to minimise risks, we see what’s happening with sanctions.

“As for our American partners and the restrictions they impose involving the dollar,” he added, “I think that is a major strategic mistake because they’re undermining confidence in the dollar as a reserve currency.”

Putin also said Russia should work on limiting risks that stem from sanctions against Moscow.

Russia's economic policies, you see, suffer from the fact that their monetary experts got trained by Western central bankers. Recall until recently the fix in the US was called Quantitative Easing, followed by QEII - which came from Helicopter Ben Bernanke, who said: “the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost”, that the existence of this technology means that “sufficient injections of money will ultimately always reverse a deflation”, and that using this technology to finance a tax cut is “essentially equivalent to Milton Friedman's famous "helicopter drop" of money.”

I suppose that was preceded by the WKRP Cincinnati helicopter drop of turkeys. Remember that Mr. Carlson didn't understand that turkeys can't fly.

Anonymous said...

Whether Trump skates or goes down in flames, both guarantee further chaos, both work to Putin's advantage. The NY Times reports that Russian hackers seem to have shifted their focus from the upcoming elections to the US power grid. Much of the public will lose faith in Trump as more and more info is unveiled regarding The Russia Conspiracy. And Trump will become even more deranged.

If the power grid goes down on election day three months from now, the US will be plunged into strife and utter dysfunction... all while devoid of leadership, and during a time of political polarization not seen since the civil war. We'd never recover. The value of US treasuries could conceivably be affected by such a thing.

This is WWIII. It ain't gonna stop if Trump goes down. Putin has to play whatever hand he's dealt. China now purchases petroleum with its new gold backed Remnimbi (Yuan). China and Russia are working together building a world monetary/credit/banking system which will make our western monetary system irrelevant. US sanctions won't mean much then. At some point China and Russia have to show their cards and abandon the illusion of playing nice. If the cover is blown on their useful idiot, then no better time than while America is struggling to figure out how to get rid of its mad king.

Alice said...

The United States has a fiat currency, we only borrow because it suits us. We could pay off our entire debt with a $60 trillion platinum coin. See the work of Joe Firestone for the details. Russia and China also have fiat currencies, but they don't seem to have worked out the signficance of that. The real problem is the possibility of a war with Iran.

Joseph Cannon said...

Ah, the Coin! I was quite taken with this idea, five years ago. I even suggested putting Batman's face on the Coin. Everyone likes Batman.

As for Iran, check out my latest.

Joseph Cannon said...

One last word about that coin. Actually, not so much a word as a link:

Seriously, though. Batman. On a trillion dollar coin. Can you picture it?