China has also publicly announced that they are lightening their reserves of U.S. treasuries.
Here is a table of foreign holders of U.S. treasuries (latest data are from before we started the war). The consequences of such shifts are complex and may be country-specific. It's a bit over my head, so interested readers will need to do some searching or offer suggestions in the Comments.
The author of that Facebook post is a world-renowned economist and the former President of Queens College, Cambridge.
Addendum: Here's an article about what happens if other countries stop buying U.S. debt. I haven't read it yet. It was written a year ago, so probably in response to tariff matters, but the principles outlined may be valid.
I'm not up to date on this and might be entirely wrong, but isn't US Treasury debt sold at auction? So it would be less a case of countries not buying it, rather they'd buy it but expect a higher coupon rate, the interest paid that is. It's the higher interest rates that would tank the US economy because you either devalue the dollar by printing money or you're going to increase the deficit. Ish. I'm not really a macro economics guy.
ReplyDeleteFWIW that linked article seems to focus more on what would happen to current treasury bonds (decreased demand, lowers the price of existing bonds making the fixed interest return which is based on the original value look like an increase on the effective interest rate based on the current trading value of the bond - yeah, that sounds garbled to me too), and kinda posits a situation where people don't want US debt - as I said, this seems unlikely. They'll still want it, but expect higher yields because of greater risk.
(If the US issues a thirty year $100 bond paying 1% interest, it pays the holder a dollar every year. At the end of thirty years it repays the original $100 amount. If a new bond is issued for the same terms but 5% interest, then recently issued 1% bonds will drop in value (away from their face value) because now the return on them is a fraction of the new bond. So if you have a bond that still has a long time to maturity but only paying 1% it will trade closer to $20 in value because 5% of $20 is $1, the value the bond is currently paying. The closer it is to maturity the more it'll be worth, because on maturity it'll be worth the entire $100 again.)
You're quite correct about the interrelationship between bond yields and prices, but you're overestimated the degree of the effect. If the interest rate inexplicably jumped from 1% to 5% overnight, the new value of a one-year 1% yield bond would drop to perhaps $95 to generate about a 5% return in the upcoming year. For the "long time to maturity" (20-year) ones, the drop would be more dramatic. I had to ask an AI to do the calculation for me. It indicated the 20-year would drop to a level of about $50.
DeleteI don't know if the AI calculation will copypaste -
https://www.google.com/search?q=Assume+a+20-year+bond+yields+1%25+interest+yearly%2C+and+assume+interest+rates+jumped+overnight+to+5%25%2C+how+much+would+the+value+of+the+20-year+bond+fall%3F&sourceid=chrome&ie=UTF-8&amc=1&gs_lcrp=EgZjaHJvbWUyBggAEEUYOdIBCjYyMTM4ajBqMzGoAgWwAgE&oq=Assume+a+20-year+bond+yields+1%25+interest+yearly%2C+and+assume+interest+rates+jumped+overnight+to+5%25%2C+how+much+would+the+value+of+the+20-year+bond+fall%3F&udm=50&aep=42&cud=0&qsubts=1779459376933&source=chrome.crn.rb&ccb=1&cs=0&hl=en-US&biw=2111&bih=1114&mstk=AUtExfDQ8PL4Qp-KUjkyrJvvN9WdJNAm09wWga_Tc3Ei0xL9wAKrEJOe52UauygK5mKHuH_9djfl-zV8ul4_whmDVt6Oimfncm_f7_osxzWEeCNwlAiDOHjTAjNvb2vMSnDOCRn8k18wHipB1iZxEcrtwFJ_ZkaJQdeGce4&csuir=1&mtid=MmUQasb7HqyvptQPncL8sAw
If people stop buying US treasuries, interest will go up, the dollar will go down, and ultimately, the euro will replace the dollar as the world currency.
ReplyDeleteNote that the EU(/euro group) is not particularly interested in this. But that is the end point of all this foolishness.
Also: Wait for the press to remember deficits matter when democrats get back in charge.
Worth noting, the new Fed Chair has been outspoken about reducing the Fed's Balance Sheet, aka their bond holdings. The Fed's strongest and most visible lever to influence rates is the Fed Funds rate, which is the overnight rate, and only indirectly affects longer-term rates. However, it can influence longer term rates by buying bonds in those longer terms, pushing up demand and prices and pushing down yields (or the reverse if selling).
ReplyDeleteThere's little that Warsh can do unilaterally, but... while there is a ton of attention paid to the Fed Funds rate and it has become a political hot potato, adjustments to the balance sheet are less freighted, so he might be able to actually influence the other Committee members to go along with his plan. They've been less outspokenly against it so far, at least.
Combine that with the above reduction in purchases from other nations, and the record high debt levels... and it certainly looks like we're heading to a future of higher long-term rates. Anyone reading this who is interested in buying a new home should probably do so before the rates get even worse.
Thanks, Kyle.
DeleteYeah, that hurt my brain. All I really understood is that the US is in a precarious financial position in which stability is questionable.
ReplyDelete