Friday, June 5, 2020

Why do people worry about China selling Treasuries?

Occasionally people worry about China "weaponizing" its US Treasuries by selling them.

Michael Pettis explains why it is not a concern and mentions that "the Federal Reserve could easily act to overcome any temporary volatility."

Based on recent Fed actions and a simple comparison of two numbers I think that it might be able to pretty easily overcome China selling its entire stash of Treasuries.

1. China's holdings as of March 2020 are below $1.1 trillion:

2. The Federal Reserve expanded its holdings of US Treasury securities by over $2 trillion in less than eight months (Release H.4.1). It held $2.12 trillion as of October 16, 2019 and $4.13 trillion as of June 3, 2020:
https://fred.stlouisfed.org/graph/?g=rbgV

Also, over that time interest rates on 10-year Treasuries have decreased from 1.75 percent to 0.77 percent:
https://fred.stlouisfed.org/graph/?g=rbhW.

Kalecki wrote "the rate of interest depends on banking policy, in particular that of the Central Bank. If this policy aims at maintaining the rate of interest at a certain level that may be easily achieved, however large the amount of Government borrowing." (Political Aspects of Full Employment, 1943).

To answer the question in the title of the post, I don't really know and we have bigger problems to worry about.

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