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Reserve managers keep buying Treasuries …

by Brad Setser
April 17, 2009

Chinese reserve growth has slowed. Russia’s reserves are down in the first quarter (though most of the fall was in January). Saudi foreign assets fell in January and February.

Most emerging economies — including some that thought they had ample reserves a year ago — want more foreign currency liquidity. They are looking to borrow foreign exchange pretty much any place they can. Russia, Korea and Abu Dhabi are all poised to issue international sovereign bonds. Other cash-constrained countries (and companies) are turning to China for help, especially if they have a bit of oil or iron ore to offer in exchange. Still others are turning to the IMF.

The amazing thing is that central banks are buying more Treasuries now, when their reserves are shrinking, than they ever did when their reserves were growing.

After several years when plain vanilla Treasuries were out of favor as a reserve asset, demand for Treasuries surged late last year. It fell off a bit in January, but picked up again in February. Moreover, we know that little has changed since then. The Fed’s custodial of Treasuries are up by a stunning $76 billion since the end of February. Central banks were particularly active in the past week. Custodial holdings of Agencies are down by a little more than $8 billion since February.

Foreign demand for Agencies has truly disappeared. Look at the following chart, which shows rolling 12m purchases of all Treasuries and Agencies, includes short-term T-bills and short-term Agencies:

Indeed, the fall off in demand for long-term Agencies has been sharper than the fall off in demand for long-term US corporate bonds or equities.

Chalk that sudden stop to the reserve managers at a few large central banks. For a while, Agencies backed by prime mortgages and an implicit government guarantee were almost as toxic to central banks as subprime debt was to commercial banks. The Fed is buying Agencies, but almost no other central bank is.

Treasuries are the only US asset foreign investors still want, despite their low yields. Over the past 12 months, the US — rather amazingly — could have financed its trade deficit by just selling Treasuries. And nothing else. At least so long as Americans didn’t move large sums out of the US.

It still could for that matter. The $85.1 billion in Treasuries foreign investors bought in the first two months of 09 (mostly in February) easily exceeds the $62.2 billion January-February trade deficit.*

At some point, though, central bank and flight-to-safety demand for Treasuries will fade. That won’t necessarily signal a loss of confidence in US government bonds. It could equally signal renewed confidence in the Agencies — or at least an and to the reallocation of existing reserves toward Treasuries.

The fact that the US is financing its external deficit entirely by selling Treasuries understandably makes people a bit nervous. After so much has gone wrong over the past year it is natural to focus on the remaining risks. The sudden loss of foreign confidence in the Agencies is a cautionary tale.

But there are also three sources of comfort:

One, it is far easier for central banks to shift out of Agencies (and large uninsured deposits) and into Treasuries than it is for central banks to shift out of Treasuries. Especially when most countries are looking to increase their holdings of truly liquid assets. China now seems worried about the safety of its reserves, but far more countries worry that they don’t have enough reserves to be safe.

Two, American demand for foreign assets has fallen alongside foreign demand for US assets. That reduces the total amount the US need to borrow from the world.

Three, the big fall in the US trade deficit means that the US has to sell far fewer foreign assets of all kinds. A $30 billion monthly trade deficit doesn’t worry me quite as much as a $60 billion monthly trade deficit.

Ongoing demand for Treasuries and faster US sales of foreign “risk” assets than foreign sales of US “risk” assets have provided sufficient financing to cover the United States’ much reduced trade deficit. But I wouldn’t want to count on the current mix of financing to cover a growing deficit. That, in view, is still where the real risks lie.

*We don’t have data on the March trade deficit, and April isn’t over. But the $135.5 billion rise in the Fed’s custodial holdings of Treasuries so far this year seems to be roughly in line with the likely deficit. On the other hand, some of the inflow must be coming out of dollar assets, though less seems to be coming out of the Agency market than in the last half of 2008.

33 Comments

  • Posted by fatbrick

    While countirs are adding their stock of t-bills to be safe, other commodities and resources could be used as diversification. That said, the focus should really be the private domestic demand for t-bills and risky assets. If t-bills continue to crowd out private assets, there is just no end of it.

  • Posted by bsetser

    “Crowding out’ works through higher yields on treasuries which pulls funds that would otherwise go into other parts of the market into gov. bonds. I don’t see much evidence that is taking place right now; the outflow from other assets seems to reflect risk aversion.

  • Posted by DJC.

    China provides $10 billion to Kazakhstan and $25 billion to Russia for Energy Development contracts

    http://www.atimes.com/atimes/Central_Asia/KD18Ag01.html

    Beijing’s intentions are quite transparent: China will tap its $1.95 trillion currency reserves to buy overseas exploration rights wherever available in Central Asia. Following up on a $25 billion loan to Russia that China dished out in February, it has agreed to lend $10 billion to Kazakhstan. China expects both the recipients to reciprocate by bolstering their energy supplies to China.

    Beijing would have taken into account these emergent circumstances when it signed an unprecedented “oil-for-loans” agreement with Russia on February 17. In terms of the agreement, China Development Bank will lend $25 billion at 6% annual interest to Russia’s state-owned oil company Rosneft and oil pipeline monopoly Transneft. In return, China will receive roughly 20 million tons of oil annually from Russia starting from 2011 for a 20-year period. The total volume of the Russian oil supplies within this framework is the equivalent of about 4% of China’s current consumption of oil and about 8% of China’s present imports. Rosneft receives $15 billion out of the Chinese loan.

    On its part, Transneft receives the remaining $10 billion out of the Chinese loan towards the cost of building a spur from the East Siberia-Pacific Ocean (ESPO) pipeline originating from Skovorodino in eastern Siberia to China’s Daqing petrochemical hub. China had earlier funded the project’s $37-million feasibility study.

    It is always a wise thing to tie up long-term energy supplies. Two, the price of the Russian oil will definitely be cheaper than the prices on the spot market, where China buys the bulk of its imports at present. Three, China has got Russia to deliver oil by a single-destination pipeline to China. Four, China is reducing its reliance on Middle Eastern oil. Five, China is reducing its dependence on the stretched-out transportation route via the Malacca Straits.

    Above all, China has persuaded Moscow to commit significant quantities of its oil away from its traditional Western markets.

  • Posted by opentrade

    Just curious I’ve heard the Fed buys Treasuries (to make up for lack of foreign demand), but now i’m also curious if the Fed buys equities traded on Nasdaq/NYSE/AMEX?

    And if so how long and how many years has the Fed been buying equities? It’s hard to estimate since no one has cracked the feds books. Also why is there no one with access to Fed Data, positions in the market, we need more transparency.

    Thanks.

  • Posted by WStroupe

    Brad,

    Just to clarify, and correct me if I’m wrong – China’s central bank is not among those buying significant sums of Treasuries, and those it is buying are the very short-dated assets, correct?

    If true, then the comments of DJC above are most relevant, since China’s moves strongly suggest it is already undertaking a strategic shift in its view of the dollar, since it is avidly converting a meaningful portion of its dollar reserves into strategic resources reserves.

    Am I wrong here?

  • Posted by Cedric Regula

    Brad:

    Since the Fed has committed up to $300B over the next 6 months to T bond purchases, it would be useful to track these as a sort of “foreign” holding. Probably should track USG purchases of GSE’s for that matter.

    Also seems to be a big decline in risk aversion since early March, with the stock market going crazy, and also a resurgence in foreign stock, bond and 2nd tier currency markets.

    Seems like a bear market rally to me still, since any positive econ data we’ve seen seems to be driven by global inventory adjustments (first way down in 4Q, then building back up…but end user demand still tepid).

    Personally I missed the stock rally, since I didn’t believe in it. But I did catch a good piece of the global bond/currency rally, and my T-bond short is working quite well today.

    Made enough to convince myself to spend a bit of it, so I bought a Sony 52 inch 120hz LCD HDTV. It is very cool and I highly recommend them. I get a kick out of seeing what lipstick shades the guys on CNBC are wearing. Keep that in mind next time you are on TV! Plus I did my part to provide some much needed stimulus to the Japanese economy.

    But seriously, isn’t it about time for a post on the Fed balance sheet?

  • Posted by opentrade

    @ Cedric,

    Yeah, no kidding, i guess i’m not the only one that wants a look at the Fed Balance Sheet.

    Also which banks have the Fed been floating with the 2Trillion loans, and what are the flows? to what institutions, and which means?

    I have alot of questions? congress/senate should also, as well as all the u.s. taxpayers.

    an analysis by brad would be helpful. his input is exceptional!

  • Posted by bsetser

    Cedric — I’ll try to post on the fed’s balance sheet soonish. The rise in its treasury holdings so far has been modest, tho it is lending fewer out …

    WStroupe — we don’t know who is adding to their holdings that NY fed. I am comfortable saying that the kind of increase we see would be hard if china was selling, but beyond that it is is any one’s guess. Personally though I do think China is still buying — and it likely bought more in march than in april b/c of the rebound in its surplus/ fall in hot money outflows associated with the uptick in confidence in march. Just a guess tho.

    Tis clear that China is buying commodities for a strategic reserves (raising imports) and buying into commodity producing firms/ countries. The scale of the purchases to date though are of a scale that could be financed by dipping into the state banks foreign deposits, or similar sources. They could be coming out of reserves, but they also could come from a reallocation of the state banks’ existing portfolio. But certainly over time these kinds of deals would cut into reserve growth.

  • Posted by jonathan

    Getting late on Friday and it’s beautiful out, but some of the flight from Agencies must be political and raw fear driven, especially now that some implicit guarantees are more explicit, so when these investors move, will some move into Agencies for the yield?

  • Posted by opentrade

    over time commodities have to come out of somewhere. my opinion is it’s already apparent that china is trimming reserves for commodities.

    i’m puzzled by the last few weeks. fundamentals are deteriorating and following Level 3 there’s been unusual buyside activity on low volume. furthermore the indicators point to buyside margin trades.

    why i want more input on Fed activities is I’m starting to wonder, following level3 data on flows at certain times if the govt has been interfering in the markets.

    i’m sure some of you likely think this post is a little out there, but it truly seems to me gov’t may have interfered with more than the adjustment of mark to market, fed buying treasuries and obama saying he sees promise…

    just a thought to close out the week.

  • Posted by Twofish

    bsetser: It could equally signal renewed confidence in the Agencies — or at least an and to the reallocation of existing reserves toward Treasuries.

    Agencies are never going to regain people’s confidence unless/until Fannie/Freddie are restructured. Their implicit government guarantee has been used up, and so no one is going to touch them without an explicit government guarantee beyond what they have been given.

    opentrade: Now i’m also curious if the Fed buys equities traded on Nasdaq/NYSE/AMEX?

    No. The Fed is very limited as to what it can buy. It is much less limited as to what it can loan. Legally it doesn’t have authority to buy equities (although there are ways around that). It can loan money using equities as collateral, but it has no reason to do that.

    WStroupe: China’s central bank is not among those buying significant sums of Treasuries, and those it is buying are the very short-dated assets, correct?

    China is buying very significant amounts of Treasuries. It’s selling even more significant amounts of Agencies so that they net reserves are down.

    WStroupe: If true, then the comments of DJC above are most relevant, since China’s moves strongly suggest it is already undertaking a strategic shift in its view of the dollar, since it is avidly converting a meaningful portion of its dollar reserves into strategic resources reserves.

    No. This isn’t what is happening. You have to be careful with statements like “China is buying.” For example, if you say that Exxon-Mobil is buying something, it may be misleading to say the “United States is buying.”

    In fact, the various SOE’s are rather autonomous, and the relationship between CNOOC and the State Council more or less resembles that of Exxon-Mobil and the US Cabinet.

    Yes the Chinese government owns CNOOC, but the US government owns AIG, Chrysler, Fannie Mae, Freddie Mac, and Citigroup. Ownership doesn’t mean absolute control.

    Opentrade: Also which banks have the Fed been floating with the 2Trillion loans, and what are the flows? to what institutions, and which means?

    Pretty much every bank in the US has gotten Fed loans. What happens is that you have loans, you show up at the Fed, and then you borrow money from the Fed with the loans as collateral. The banks then reloan out the money to you and me, once the bank has a new loan, it goes back to the Fed and uses that loan to borrow another fresh batch of cash.

    If you’ve taken out any loan of any kind this year, much of the money is fresh from the Federal Reserve’s electronic printing press, since no one else is interested in lending money to anyone but the US government.

  • Posted by Twofish

    opentrade: over time commodities have to come out of somewhere. my opinion is it’s already apparent that china is trimming reserves for commodities.

    I don’t think that they are. If you look at who is buying, it’s the State Reserve Bureau and SOE’s being financed by banks owned by CIC.

    If the second was financed from the foreign exchange reserves, everyone would know about it, since the transactions of the of state banks are pretty public (i.e. they are audited by Western accounting firms and some of them are listed on the NYSE or in HK). If the ultimate source of funds for the takeover was SAFE, they’d be legally required by US and HK securities law to report this.

    The government could theoretically transfer money from the foreign exchange to the State Reserve Bureau, but SRB is under the National Development and Reform Commission and NDRC and PBC hate each other so much, that I doubt that SRB is getting any money from the foreign exchange reserves.

    I do note that a lot of the press releases of “CHINA IS TAKING OVER THE WORLD, BUY COMMODITIES” seems to from people with obvious motives to promote that idea.

    opentrade: why i want more input on Fed activities is I’m starting to wonder, following level3 data on flows at certain times if the govt has been interfering in the markets.

    The government is always interfering in the markets. The only question is how and why.

    I don’t see any reason why the government would want to buy stock on the open market, I don’t see how they could hide it, and I really, really don’t see why they would want to.

  • Posted by opentrade

    @ 2fish

    “I don’t see any reason why the government would want to buy stock on the open market, I don’t see how they could hide it, and I really, really don’t see why they would want to.”

    Couldn’t Fed provide liquidity to players such as GS or JPM under terms “buy this sector” or “buy oh say S&P futures”?

    and “Why would they want to hide it”

    Well, Govt interference in the markets completely takes away the “free market” approach we all believe in…

    More interesting to note is I have heard a few Europeans think a possible Currency swap is a strong possibility for a few of the EU nations with China. Not sure if news worthy, but interesting…

  • Posted by Ying

    US trade deficit will soon be balanced with diminishing demand. All efforts to deal with the financial crisis has been directed to make financial institutions solvent and investment. Consumption which takes two third of US economy is squeezed. Less dollar will be recycled back to US economy. There is no sigh of recovery to previous stage. Every country is moving into new stage of economic history.

  • Posted by locococo

    In an efficient market, why would those worried about the safety of its reserves not meet those who worry that they don’t have enough reserves to be safe, without the go-between?

    Because of manipulation that we learn is not of a Chinesse origin this time arround or because there is no such think as efficient market, even for the truly liquid “things” (backed by all those illiquid ones and the print o` machine on top)?

    Anyway, do let us fiscally stimulate ourselves, until we figure this one out …

  • Posted by Twofish

    jonathan: Agencies must be political and raw fear driven, especially now that some implicit guarantees are more explicit, so when these investors move, will some move into Agencies for the yield?

    It’s fear driven, but it’s rational fear. Before July 2008, agency bonds were marketed and seen as “practically the same risk as Treasuries.” After July 2008, they aren’t. There are very, very good reasons for people to move from agencies.

    First of all the explicit guarantees are awful. Freddie and Fannie each have about a $100 billion guarantee against about $2 trillion in assets. It’s quite possible that one of the two will run out of guarantee, and it’s also quite possible that Congress will just refuse to fund things if that happens.

    Second, the yield is not worth the risk right now. If you were to price Freddie/Fannie securities at market risk prices, the mortgage markets would freeze solid. To keep this from happening, the Fed has been dumping massive amounts of money into F&F, which causes the yield on agencies to go down, which causes everyone other than the US government to dump agencies and buy Treasuries.

    Third, no one has any clue what the GSE’s are going to look like two years from now or what the guarantees on current agency bonds are going to look like in two years.

    opentrade: Couldn’t Fed provide liquidity to players such as GS or JPM under terms “buy this sector” or “buy oh say S&P futures”?

    Not without it making the front page of the Wall Street Journal the next day. GS and JPM couldn’t take this sort of money without broadcasting it to the world, and the Fed couldn’t give this sort of money without broadcasting it to the world.

    Also after the AIG bonus fiasco, both GS and JPM are really, really skittish about taking any sort of money from the government for fear of the strings that might be attached to bonuses and salaries.

    Finally, what would be the point? The Fed doesn’t have enough spare money to move stock markets very much for very long.

    opentrade: Well, Govt interference in the markets completely takes away the “free market” approach we all believe in…

    Who’s we? I don’t think markets can work without massive government intervention and regulation. We can argue about the types of intervention and regulation, but I don’t think that a policy of “no intervention” will work at all.

    locococo: In an efficient market, why would those worried about the safety of its reserves not meet those who worry that they don’t have enough reserves to be safe, without the go-between?

    It wouldn’t, but efficient markets is this silly academic theory that sometimes bears no resemblance at all to the real world.

    One place where efficient market theory truly and totally breaks down is when you have large sums of money. If I want to buy or sell $10,000 or even $10 milllion in securities, then you can have something that looks like an efficient market. There are lots of people that will buy $10 million of bonds.

    If I want to sell $100 billion in agencies bonds, then the markets are anything but efficient. Suppose China wants to sell $100 billion in agencies, who is going to buy?

    Efficient market theory also totally breaks down when there is a crisis.

  • Posted by DJC

    US Economy fundamentally on “Thin Ice” says John Hussman. Corporate and Mortgage Debt are very dangerous. If foreign central banks have to own fiat printed US Dollars, only US Treasury bonds are the only deal left.

    http://www.hussmanfunds.com/wmc/wmc090413.htm

    Fundamentally, my view is that the U.S. economy is on very thin ice, and that by focusing on the bailout of corporate bondholders rather than the restructuring of debt, we are courting the risk of a far deeper downturn. Last year, I didn’t think it was conceivable that policy-makers would attempt to address this problem by making lenders whole with public funds. This is an ethical abomination, putting the public in the position of absorbing the losses that should properly be borne by those who provided capital to these institutions. It is not sustainable. What it does is place the public in the position of losing first, but it will not, and cannot prevent the ultimate failure of the debt – for the simple reason that without restructuring, the debt can’t be serviced.

    In recent weeks, the financial markets have taken enormous hope from economic data that has outpaced depressed expectations – generally only slightly, but uniformly enough to encourage investors that the “green shoots” of recovery are in place.

    Careful. We’ve seen a nice bounce to clear an oversold condition, coupled with the very ordinary “ebb and flow” of economic data that periodically offers intermittent relief even in the worst economic downturns. What we haven’t seen to any real extent is “revulsion.” Quite to the contrary, investors have frantically bid up the worst credits – distressed financials, homebuilders, and heavily leveraged cyclicals, while the percentage of bullish investment advisors has quickly surged above the percentage of bearish advisors.

  • Posted by fred

    There’s no doubt that foreigners will continue to purchase treasuries. There is serious doubt, approaching incredulity, that foreigners will continue to purchase treasuries at current rates of interest for any significant period of time.

    You can set your price, you can set your quantity, but you can’t set both.

  • Posted by Cedric Regula

    fred: ….approaching incredulity….

    “surpassed”, in my book.

    The USG just announced that medicare in its current form will bankrupt the USG in 10 years.

    Everyone knows Fed monetary policy will be inflationary in time, say 2-3 years, just not at the moment. The debate is over how inflationary.

    If we get everyone to buy or re-finance homes at current prices and 4.5% mortgages, we have made the housing crisis permanent once mortgage rates go back to even just the historical norm of 8%.

    The buck needs to drop in half to maintain trade balance once global trade resumes again.

    And who was it that decided the US is the only country in the world that can pay its bills in a stable currency????

    We just had a tax protest with TEABAGS IMPORTED FROM CHINA !!!!!!

    With that as a backdrop we sell 30 YEAR Treasuries at 3.8% !!!!!

    Hence my TBT ETF double treasury short. I call it “poor man’s gold”.

  • Posted by jolly

    Federal reserve needs to raise rates and raise rates fast if they wish to continue selling Tbills to foreigners. The ROI is beginning to dwindles vs. both commodities and equities.

    If this continues, the Tbill bubble will surely pop, much sooner before later.

  • Posted by Bo

    Hi, Mr. Setser and fellow commentators:

    I am doing some research on China’s foreign foldings. Just curious about your opinion on the amount of Chinese asset that is liquid and its likely reinvestment strategy to mitigate dollar risks. Thanks,

    Bo

  • Posted by Bo

    Sorry, I meant China’s foreign holdings.

  • Posted by purple

    China says about 300-500 billion of their reserves are liquid. It was in the news recently.

  • Posted by jolly

    slow “run” on tbills is soon to start…pay attention to what happens this summer.

    deflation-deglobalization-protectionism=Depression.

    Fed better start buying more Tbills, China getting very close to inking deals with EU on increased investment/trade and currency swaps.

    u.s. is approaching check-mate. bump interest rates up and housing will suffer even more, continue to print and your lookin at internal hyperinflation, the tbill bubble has gotten so large, so fast, it’ll make the housing bubble look like a “non-event” in comparison…

  • Posted by jolly

    And my thoughts, if according to Geithner and the financial times article where regulators whispered all 19 stress tests passed…remarkable!

    everyone has lost complete trust and honesty in the u.s. financial markets/regulation.

    moving away from mark to market? well, guess AIG could no longer pay the bills……

    this will be worse than Japan.

  • Posted by DJC

    To Brad Setser of the CFR, the United States must end America’s unrealistic crusade of imposing its Neo-liberalism globalization agenda on the rest of the world.

    http://www.csmonitor.com/2009/0408/p09s01-coop.html

    Now, as a massive retrenchment of the US economy is under way, it is time to shake the mental shackles of the superpower legacy and embrace a more peripheralist agenda. That need not mean isolationism or retreat. It would still require maintaining substantial armed forces with a qualitative edge, but using them only when there is an affordable and persuasive American national interest. Iraq never fitted that description.

    The price tag for the wars in Iraq and Afghanistan wars is in the trillions. Sun Tzu, the ancient Chinese military commentator, prophetically observed 2,500 years ago, “[W]hen the army marches abroad, the treasury will be emptied at home.”

    It remains a lingering American myth that US troops and warships can go anywhere and pay any price. Not so. The modern Chinese have discovered a better way. The Washington Post reports that the Chinese went on a shopping spree recently, taking advantage of fire-sale prices to lock up global supplies of oil, minerals, and other strategic resources for their economy. That amounts to a major economic conquest – without using a single soldier. By contrast, American efforts to secure oil have looked clumsy.

    Americans need to acknowledge that war, like politics, is the art of the possible, and both have their limits. It’s time to lower our geopolitical sights and end America’s unrealistic crusade. We shouldn’t expect “them” to want to be like “us.”

  • Posted by bsetser

    hmm — china has about $750b in treasuries, all of which would normally be considered fairly liquid assets. though for a country like china, the sheer size of its portfolio makes some liquid assets less liquid, as china couldn’t easily sell w/o moving the market.

    and i don’t see any reinvestment strategy that could limit china’s dollar risk. china could sell some dollars, but that means realizing the dollar risk on its existing portfolio (if china moves the market). china tried offsetting the risk of rmb appreciation v the usd by buying more risky usd assets to try to get a higher return, but that didn’t work out so well. realistically, the best way for china to limit its dollar risk is for china to stop adding to its reserves portfolio. there is no magic solution here. china took on a ton of dollar risk as a byproduct of its efforts to hold the rmb down. so long as those efforts continue, it will add to its dollar risk.

  • Posted by K T Cat

    Brad,

    I think your headline is a bit optimistic. It looks to me like this is another vote of no confidence in the US and another step towards the exit for China. Leaving Agencies is not something you’d do if you were going to get more involved in the US, is it? Instead, the Chinese are moving their money into Treasuries, the only thing explicitly backed by the US Government.

  • Posted by gillies

    china is tied in to acting with caution, because precipitate action could lead to a ‘run on the bank.’

    conversely the united states (correct me if this is mistaken ) is tied to issuing treasuries with caution, proceeding only as it sees what the market can absorb.

    i never believed the ‘helicopter money’ propaganda that ‘printing’ the fiat dollar can be done without suffering consequences.

    zlotys and krona might break off the global financial structure – but the dollar is 60% or so of the structure. if it breaks down (a) it may bring the rest with it, and (b) even if everything breaks up it is still the biggest fragment among the rest.

    the euro is big too, but the euro countries might suffer stresses of their own in adverse circumstances, and fragment along national lines.

    as i do not understand the dollar/yuan argument that rumbles on and on, i suspect that it is in some way coded language for something different. or perhaps an antidote to guard against the onset of a serious deflationary mindset ? or is it that if the bond market dived, the united states could no longer afford to service more debt at the higher interest rates ?

    if everyone is so certain that china cannot afford to pull back (whether selling or by buying less ) what do they imagine that the economic situation would be that followed ? china loses say $500 billion, japan loses something similar and is not pleased. what do america and europe lose ? they would not be unscathed.

    - or maybe we should all go that route – before the zombie banks are joined by a zombie bond market and the first ever zombie superpower ? the present argument is like a conversation between two elephants in a rowing boat, each worrying what would happen if the other made an unexpected move.

    but again, if enough people believed the ‘copper standard’ story and began to rush out of sinking bonds into soaring copper – would china and japan be obliged, by the size of their holdings, to sit still while small departing reptiles upset the boat ?

    i have no answer to offer – except to observe that those who issue fiat currency have to be more sensitive to issues of trust and confidence than lesser mortals who dig in the earth for gold, silver, and copper.

  • Posted by Tono

    To Cedric Regular above,
    I have begun tracking on a weekly basis how the Fed’s QE is going for each of the asset purchase program (Agency, MBS, and Treasuries). Next week I will overlay the UST30 yields and the dollar index to see if there is any implicit market cost to QE.

    http://www.debtorsprisonblog.org/journal/2009/4/17/how-is-the-fedbs-qe-doing.html

  • Posted by Bo

    Great comments. Mr. Setser, how can China stop the accumulation of dollars? Only the U.S. has the economic capacity to be bought up on China’s scale. Are there better strategies of stopping the accumulation through the currency swaps? The current Chinese currency swaps seems to allow China to swap in a bunch of worthless currencies. It’s some sort of diversification while internationalizing the yuan, but the currencies swapped in makes the effort somewhat less satisifactory.

  • Posted by Cedric Regula

    Tono:

    Great! I’ll be following your blog.

    My gut tells me we won’t see much close correlation in the near term. This is always “a problem for our grandchildren”, until the market decides otherwise.

    Probably the thing that makes the market change its mind will be a reversal in risk aversion, and search for real return.

    We have seen some of this in the recent market rally, but already this morning on CNBC there is lots of talk about whether the S&P 500 will retest its 670 lows, or whether we just get a 50% retracement! T-bond and dollar mini-rally today in sympathy!

    So there is no straight line in the markets as long as the deleveraging/credit crunch/deflation/econ slowdown/Fed propping up treasuries thru purchases scenario…. is still ahead of us.

    But after that passes watch out!

  • Posted by Hydrolyze Dude

    I’ve started searching all over for this post. Luckily I just discovered it in Google.

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