Global markets ignore US debt risks
by Herbert Poenisch in Beijing
Thu 5 Apr 2018
China’s surging global influence is like the rising tide: barely noticeable but steady. However, once it reaches fundamental structures, such as US Treasuries, the lynchpin of the financial system, western policy-makers should pay attention.
The western view of the rating of Treasuries has been rather benign. The Big Three rating agencies have awarded Treasuries top grades, with only one reducing this rating by one notch because of concerns that the US was approaching its debt ceiling, the total amount the government is authorised to borrow. However, western and eastern ratings are increasingly at odds. China’s most prominent rating agency, Dagong Global, downgraded Treasuries to BBB+, with a negative outlook, in early 2018.
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In its justification, Dagong states that the US administration has difficulty focusing on the management of the economy, federal debt is escalating and recent tax cuts reduce the government’s ability to service its debt. The growing gap between government revenues and the debt means the US government is badly prepared to face the next crisis. It cites weakening repayment ability as one reason for the negative outlook.
It seems as if global financial markets are ignoring warnings that the credit risk of US government liabilities is not being assessed properly. Renegotiation of Treasuries is not a prime concern, but there will be large ramifications for the financial system if their value is reassessed. There will be direct losses for those who hold Treasuries, but they also serve as collateral for myriad other financial transactions. According to the rules of the Securities and Exchange Commission, the US regulator, Treasuries can cover up to 95% of any borrowing.
For the moment, China is a lone voice, but Dagong is determined to take on the complacent Big Three. Global financial markets have not heard enough alternative views, particularly on credit markets.
The largest holders of Treasuries might take a direct hit from the deteriorating credit risk. Out of a total of $6tn, China held close to $1.2tn and Japan $1.1tn at the end of 2017. Hong Kong holds a sizable $200bn. In addition, most countries added to the stock of US Treasury securities in 2017.
Most creditors of the US Treasury agree that the dollar has to be replaced as the world’s dominant reserve currency in the long term. In the short term there are a few options. Given that US interest rates are likely to increase and the country will need to borrow more, returns will inevitably have to rise, perhaps also reflecting the deteriorating credit rating. Holding higher yielding securities offers some relief, but they are still paid in the same depreciating currency.
If US creditors were to look for real value, it is an option to purchase resources anywhere in the world for dollars. China is already doing this. It is buying real assets around the globe, ranging from mines to ports.
Those wanting to dump Treasuries might explore swapping US debt for US equity, where the Committee on Foreign Investment in the United States permits. If more holders of Treasuries go down this road, the committee might become overburdened with approval requests. If the promised US recovery materialises, it might be a better choice to target real returns rather than illusory financial ones.
Herbert Poenisch is a Member of the International Committee of the International Monetary Institute at Renmin University of China, and former Senior Economist at the Bank for International Settlements.
IMO, at some point, the dollar will be devalued by 50%.
Put that in the college fund.
Why would there be anything wrong with a “devaluation” of the dollar?
The dollar is being steadily devalued each year by the amount of the annual deficit.
They use a secret code word for it: Inflation.
Yes, just 2 cents per dollar left to go to hit its inherent value of zero per the Fed Reserve publications.
I agree KoKo but I’m going with a 30% downgrade. Should mirror the UK when they lost reserve currency status.
IMO, If you’re in paper assets like 401s, stock, bonds, etc you need to seriously rethink that position. What happened in 2000, 2008 is coming again and it’s gonna be much bigger and badder (50-90% correction). TBP demographic is 50-65 year olds(?). Can you absorb a huge loss at this point in life? Exit paper at least temporarily. Yes, there is a stock market “melt up” but it is equivalent to the amount of dollars being printed out of thin air. Therefore, no real appreciation; it’s illusory nominal gains. Good Luck
14 reasons to consider silver
https://www.youtube.com/watch?v=cY-CQFYJQMg
What does JP Morgan know that you don’t?
http://www.marketoracle.co.uk/Article44278.html
I’ve been hearing about this for years and years, when is it going to actually happen?
Most people can’t just sit back and wait for something that may not come about until after they have died of old age.
Anonymous
Steve is right…but I understand your impatience, the fact “they” have held the Everything Bubble together into Spring of 2018 is amazing…I never, ever expected it to hold together this long…buts its OK I went LONG. Hell’s bells…they may even be able to hold it together longer still…but I doubt it will be years. That 2012 Silver video Steve posted (it was made after a desperate and successful international effort to keep Gold from reaching $2,000.00 an ounce and force it back down by the Central Banksters during Obama’s reign) is even more true today then when it was made.
I understand how difficult the branches of the decision tree are with finite resources and economic demands…I came up from nothing…just hedge as much as you can afford to…to go LONG with physical PMs. At the very least consider it the greatest real money/wealth – RESET insurance policy you can have tucked away. Even just a 5% of your savings is prudent or what ever works for you?
PMs today are even a better time to buy then the late 90’s and buying during that era ended up to be the most successful trade of the first decade of the current century.
I had family members who laughed in my face when I went in deep – in 99…they weren’t laughing in 2008/9.
I BOUGHT SOME GOLD IN 1971 for $68/oz. Much more later at $215/oz. Then some at $400/oz. Been a long, slow road, but that’s the nature of the beast. So, it’s been happening, just too slow for you to see.
China Declares Trade War Victory: Gloats At US “Suffering” After “Crushing Counterattack”
by Tyler Durden
Thu, 04/05/2018 – 10:56
Barely a day after China dropped the hammer on US stock markets by unveiling retaliatory tariffs on $50 billion in US imports that – unlike US measures that mostly targeted obscure industrial products – actually struck at key industries like soybean farmers, automobiles and airplanes, the Communist Party crowed about what it already sees as its “victory” in the nascent trade war in an editorial published by the Global Times, China’s state-owned, English-language tabloid and extremely hawkish party mouthpiece.
In the editorial, China swatted away US claims – repeated most recently by Larry Kudlow during this morning’s interview with Fox Business’s Maria Bartiromo – that China has somehow victimized the US via its trade agreements while gloating about the leadership’s decision to strike at a “massive weak spot” for the US economy.
While the tit-for-tat tariffs could hurt both economies, the damage to China’s economy caused by the US’s Section 301 tariffs will “pale in comparison to the damage done to the US economy via China’s retaliations.”
And just to illustrate that point, literally, a Chinese cartoonist showed that another way Beijing will hurt the US is by a “stockmarket squeeze.”
Furthermore, in standing up to America’s “bullying tactics”, China warns that the pleasure the US had derived from its sanctions in the past “will now cause them suffering as their financial and political gains diminish to zero.”
This is Beijing’s clear show of retaliation toward the proposed tariff list on Chinese products from the US. Beijing showed an impressive response time for its retaliation efforts, taking less than 12 hours to announce its trade countermeasures. Chinese officials agree that its country’s countermeasures match those imposed by the US and that they showcase China’s determination to win this trade war.
It is worth noting that China strikes the US side by targeting its most valuable imports, such as soybeans, automobiles and chemical products. These aspects were targeted because they represent key pillars in the US imports and can create a massive weak spot for the US economy if their profitability is at risk.
Although China will sustain financial losses thanks to the US’ Section 301 investigation tariffs, they will pale in comparison to the damage done to the US economy via China’s retaliations.
China’s counter tariffs are a spectacular way of standing up to America’s bullying tactics, not only for itself, but for other countries threatened by the US’s new trade policies.
And with China digging in for a long, protracted trade conflict, one from which it will never surrender, if it is indeed Kudlow’s – and the Administration’s – hope that China will concede to US trade demands, then there will be much disappointment all around.
Underscoring China’s preparation for a “scorched earth”, and tit-for-tat escalating war, the Chinese government has told its citizens it is prepared to go toe-to-toe in its fight with Washington. In fact, more and more Chinese citizens think that an “epic trade war” is inevitable, which would knock some common sense into the US government so that it will change its way of dealing with China.
Hawkish politicians in Washington have obviously overestimated the capability and endurance of the US economy in a trade war, since they believe they can do whatever they like. China has shown a great deal of restraint for now, but if the US persists in this trade war, China is ready to fight to the end.
Washington will eventually see what they have lost, thanks to their actions, and it will only serve to embarrass the US. This trade war will serve as a good example to the US that it cannot use intimidating trade tariffs as a form of diplomacy.
Before China announced its recent retaliatory tariffs on US products, Washington enjoyed crushing and threatening other countries on trade sanctions. Now, as China deploys its counterattack, the pleasure that the US achieved from those tariffs will now cause them suffering as their financial and political gains diminish to zero.
If a trade war does happen, China has contingency plans to help its economy avoid a slump.
And, in a dramatic break with precedent, China warned it could even take steps to weaken the US dollar, something that, if history is any guide, should be a concern to the Treasury market as it would suggest that China may be thinking of liquidating its Treasurys .
Many believe that the Trump administration’s $50 billion tariff on Chinese products is meant to pressure China to submit to the US demands. If that is the case, the US will undoubtedly lose. This is because the Chinese government has rallied its citizens and is prepared to go toe-to-toe in its fight with Washington. In fact, more and more Chinese citizens think that an “epic trade war’ is inevitable, and could knock some common sense into the US government, so that it will change its way of dealing with China.
If the trade war happens, China will show that it has just as many reserve plans as the US, if not more. Chinese experts suggest that China could even take actions to weaken the strength of its currency. Since China is the world’s largest trading economy and the largest buyer of commodities like oil products, China could use its influence to push its own currency, RMB, in global markets to reduce the dominance of the US dollar. That would be a heavy blow to Washington.
If this trade war comes to pass, it will be an evenly matched total war between China and the US economies, and not some small scuffle. It would be delusional for the US to think it will be victorious at the end of this trade war. China comes up with the conclusion in confidence, and will not shy away from letting Washington know in this situation.
And while taking overt steps to weaken a currency would violate a G-20 communique agreeing to avoid currency wars through competitive devaluations, we doubt that would stop Beijing should Trump push it too far.
Meanwhile, a greater – and more likely – risk than a Treasury dump by Beijing is another devaluation: after all the Yuan is already back to where it was in the days just before the Yuan’s 2016 deval. Fears about an impending yuan devaluation akin to the drop that unleashed turbulence across global markets back in August 2015 have historically had a negative impact. Traders will remember 2016, when markets got off to one of their worst early performances in decades as continued daily, if less acute, Yuan devaluations hurt stocks.
While this warning appears to have been largely overlooked by markets, it’s definitely something to keep in mind.
how do you spell pravda in chinese?
I’m all for a Bigly trade war.
Tyler seems to think China holds the upper hand.
The US should continue and concentrate on food; soybeans were a good example, as China cannot make up for the product lost to feed pigs and substitution is not really available.
Millions of starving peasants = uh-oh.
That’s right, they are having a real problem feeding the vast numbers of their peeps going forward. That is why we are shipping pork to China by the boatload and why the Chinese have bought up 45% of our food production here in the US. So, who is bullshitting who here?
OTOH, a lot of this is due to the Chinks having more spendable cash and a lust for meat products.
I am supposed to believe Bejing has been suffering under the trade deals for the past 40 years.
Gimme a fuckin break, we can make our own shit, eat a bag of dicks.
Gimme a fuckin break, we can make our own shit[and] eat a bag of dicks.
You guys are kinky. Are they the pickled kind in Kool Aid?
Not pickeled, as the bag will not hold liqued. They are shriveled lil chink dicks, aged hard, and there are a lot of them, it is a big bag, to feed a billion communist fucks.