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Optobear

Is The Debt Owned By China Really Just Money?

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So, here is what I find myself wondering.

China owns close to a trillion dollars of US debt. I think that is a given?

http://www.washingtontimes.com/news/2010/mar/02/chinas-debt-to-us-treasury-more-than-indicated/

So that looks, bad, the US will have to pay back their debts. China hold the cards, and the US is at their mercy - the Chinese owns Uncle Sam's ass.

But, my understanding is that the debt is mostly treasuries, and as far as banks are concerned they treat treasuries as essentially the same as cash. In fact, banks even prefer to change the ownership of treasuries rather than cash when money is transferred as it is simpler and directly equivalent.

So does that mean that the $800bn of debt held by China is really just the same as China having $800bn of dollar bills?

In which case, it isn't that China owns the Uncle Sam's ass. More that they own $800bn of pieces of paper money?

If so, then what is the problem? The last decade becomes one in which China produced masses of physical goods and transferred them to the US in exchange for pieces of paper? The question is why on earth China went along with that?

Optobear

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So, here is what I find myself wondering.

China owns close to a trillion dollars of US debt. I think that is a given?

http://www.washingtontimes.com/news/2010/mar/02/chinas-debt-to-us-treasury-more-than-indicated/

So that looks, bad, the US will have to pay back their debts. China hold the cards, and the US is at their mercy - the Chinese owns Uncle Sam's ass.

But, my understanding is that the debt is mostly treasuries, and as far as banks are concerned they treat treasuries as essentially the same as cash. In fact, banks even prefer to change the ownership of treasuries rather than cash when money is transferred as it is simpler and directly equivalent.

So does that mean that the $800bn of debt held by China is really just the same as China having $800bn of dollar bills?

In which case, it isn't that China owns the Uncle Sam's ass. More that they own $800bn of pieces of paper money?

If so, then what is the problem? The last decade becomes one in which China produced masses of physical goods and transferred them to the US in exchange for pieces of paper? The question is why on earth China went along with that?

Optobear

and the answer to your question is, yes.

details are on my blog.

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Afaik government debt is treated as cash but it's value depends on market conditions, $800bn in bonds one day won't necessarily be worth $800bn the next.

If the FED have been depressing the yield surely the value of China's T.Bill assets would have gone up then? In which case it may be time to get out into hard commodities or something with lower counter-party risk. With $1trn in treasuries the ball is entriely in the FED's court, if China don't do something to offset this massive risk they'll only have themselves to blame.

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Afaik government debt is treated as cash but it's value depends on market conditions, $800bn in bonds one day won't necessarily be worth $800bn the next.

If the FED have been depressing the yield surely the value of China's T.Bill assets would have gone up then? In which case it may be time to get out into hard commodities or something with lower counter-party risk. With $1trn in treasuries the ball is entriely in the FED's court, if China don't do something to offset this massive risk they'll only have themselves to blame.

Exactly so, the Chinese have the paper money, the US consumers the cheap electronics and other goods. Who looks clever?

Also, as you say, the FED can just keep on printing dollars issuing treasuries via a deficit government budget. Is this all about devaluing the chinese currency?

It really is all topsy-turvy. The richest nations hold paper money and the most indebted nations have the goods?

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I believe the Chinese are holding more money than treasuries.

Although my thesis is that both are largely equivalent.

But that aside, why are they wanting to hold so many dollars? Are they all planning to visit Disneyland next year?

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Although my thesis is that both are largely equivalent.

But that aside, why are they wanting to hold so many dollars? Are they all planning to visit Disneyland next year?

Fix the value of the Rembini.

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Imo there are two issues here that sometimes get lumped together.

1) the probablity that China will lose the value of their T.bills due to haircutting or default.

2) the relative value of the $ vs the rembini.

I don't know which one China is more concerned over.

Edited by Chef

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Of course, the debtor can always stick two fingers up to the creditor and tell them that they're not going to pay or debase their currency to the point where the debt is worthless. This of course leaves the debtor open to the risk that the creditor takes action to recover their wealth.

Now, which country has an absolutely massive military force and huge nuclear arsenal and could possibly get away with defaulting?

If I were the Chinese, I'd be thinking very carefully about how long they want to be acting as slaves to maintain Western standards of living given that they are unlikely to get a payoff.

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Imo there are two issues here that sometimes get lumped together.

1) the probablity that China will lose the value of their T.bills due to haircutting or default.

2) the relative value of the $ vs the rembini.

I don't know which one China is more concerned over.

Why would they be worried about #1. It obviously hasn't worried them since they pegged, and as long as they continue the peg the purchasing power is constant, in Renminbi terms.

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Why would they be worried about #1. It obviously hasn't worried them since they pegged, and as long as they continue the peg the purchasing power is constant, in Renminbi terms.

I can think of a trillion reasons why they might be worried about #1 ;)

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I can think of a trillion reasons why they might be worried about #1 ;)

Everything comes down to the peg. Nothing else matters. China kept buying US debt during the 2000's while the dollar was collapsing. As long as there is a trade deficit between the US and China, China will continue to buy US Treasuries. This is zero sum.

If they break the peg, then they might get concerned, but not before.

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TO Fix the value of the Rembini.

I know it's what you meant, but others might not have read it that way. China do the same with the Japanese. They buy shed-loads of Jap debt to depress their own currency vs the Yen.

As to :

Exactly so, the Chinese have the paper money, the US consumers the cheap electronics and other goods. Who looks clever?

Just look at the politics on the ground. Chinese workers are beavering away, convinced they have a better future, and tasting it right now. Americans find themselves looking at a future w/o jobs, which, in their minimal welfare state economy, looks like a future of desperation.

The upshot is the Americans are beginning to despise their government : THE AMERICANS! Meanwhile the Chinese see cities like Beijing and buy TVs and think : my country is really coming up in the world - which is a short hop away from "my government is pretty decent". Imagine: a country that was founded on liberty of its citizens is beginning to regard its government as oppresive, socialist, incompetent and damn-right corrupt. Meawhile a government that was oppresive, incompetent, communist and damn-right corrupt is beginning to be regarded by some of its people more favourably.

Lob into that the middle classes - the Tea Party lot. They might hate Communists, but hey, American politicians are going that way wnyhow. By contrast, the buzz of Beijing looks, at least on the surface, a hotbed of free-market capitalism. Tea Party types raelly just want to be left alone. They want to know what is theirs, so they can take charge of their own future. How do you think "default" or "quasi default" sounds to people like that? Remember, we aren't talking about Wall Street spivs buying mortgage debt at high yields, knowing the taxpayer would be forced to bail them out. We're are talking about a hard working country buying treasuries: solemn promises struck at more than reasonable rates of interest.

In short, play this game long enough and sooner or later, the Chinese government might be regarded more favourably than the American one. That's the kind of PR stroke a country like China needs if it wants to start an empire whilst the US is still the world's policeman.

The article makes reference to Suez. We, a debtor nation, found ourselves unable to prosecute a military venture. Political and economic capital went hand in hand. The flip side of the coin is that creditor nations are politically more capable of military ventures.

Maybe not so stupid.

Edited by Sledgehead

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Of course, the debtor can always stick two fingers up to the creditor and tell them that they're not going to pay or debase their currency to the point where the debt is worthless. This of course leaves the debtor open to the risk that the creditor takes action to recover their wealth.

Now, which country has an absolutely massive military force and huge nuclear arsenal and could possibly get away with defaulting?

If I were the Chinese, I'd be thinking very carefully about how long they want to be acting as slaves to maintain Western standards of living given that they are unlikely to get a payoff.

nuking the customer is never good business.

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What happens to their own currency if they spend it?

They devalue the $ and find it harder to capture the U.S market?

My moneys on #2.

#1 is gathering dust - its job done.

Fair point. China's like a vast state version of my nan, keeping all her money under the mattress just in case.

Edited by Chef

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nuking the customer is never good business.

And totally unnecessary. Governments are nothing more than democratically sanctioned mafia families. If your family is weakened and owes me money, there is no point in kicking down your door and seizing your vineyard: I know after all you can't make it pay its way. Why should I be able to? Rather I make a play of capturing the "business" of your associates. It doesn't even have to be bloody. They just need to understand the situation: your family is broke, always demanding ever more punative terms of trade, untrustworthy when it comes to settling debts, and torn apart by political in-fighting.

That's how you walk into Taiwan. And plenty of other places.

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Just look at the politics on the ground. Chinese workers are beavering away, convinced they have a better future, and tasting it right now. Americans find themselves looking at a future w/o jobs, which, in their minimal welfare state economy, looks like a future of desperation.

The upshot is the Americans are beginning to despise their government : THE AMERICANS! Meanwhile the Chinese see cities like Beijing and buy TVs and think : my country is really coming up in the world - which is a short hop away from "my government is pretty decent". Imagine: a country that was founded on liberty of its citizens is beginning to regard its government as oppresive, socialist, incompetent and damn-right corrupt. Meawhile a government that was oppresive, incompetent, communist and damn-right corrupt is beginning to be regarded by some of its people more favourably.

Chinese workers are beavering away, but they are not tasting the fruits of their labour. China's gini coefficient is one of the worse in the world, and there are many problems with corruption faced by ordinary Chinese. This problem has been acknowledged at the highest levels of the party where the question is being asked why after a couple of decades of boom, has the real salary levels of your average worker or peasant barely moved. The answer is that the elites of China have robbed them blind with the money being concentrated in fewer and fewer hands. This can be partly seen in the massive house price boom there. This is why the party's 12th 5 year plan is all about raising wages (I started a thread on the topic this week). Certainly you will meet Chinese over here who will bang on about how great their govt is. Of course it is great for them, the sons and daughters of the corrupt. Ask a Beijing taxi driver doing 18 hr shifts 7 days a week what he thinks of his govt, I think you'll get quite a different answer.

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The US can default.... but who says China actually has the money anymore? In that they may well have dumped it a while ago or spent it. Bank balance sheets are riddled with fraud... Hell even the US gold reserves have not been examined since the second world war. Yet they still claim it is there.

Can I have a look?

No

How do I know its there then?

Trust me.

No

*gets gun out* trust me....

Um ok

Kind of like the bit in the film my cousin vinny.

In that the incredible infrastructure projects aren't exactly cheap. For instance the 1000s of km of tunnels for the south north water project. Also whenever adventure riders and drivers cross central Asia they encounter tons of Chinese workers building infratructure for those countries.

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I always like to give China-bashers some meat to chew on. I suppose we all know that the largest foreign owner of US treasuries is China. Some of us may also know that the second largest owner is Japan. Who knows who the third largest holder is? Yes, you guessed right it's the UK at just over half the amount that China's holding (ref: http://www.ustreas.gov/tic/mfh.txt). There are also many many other countries who hold US treasuries. Now as all US treasuries are fungible, i.e. $1bn of Chinese held US treasuries is by all purposes the same as $1bn of British held US treasuries, it follows that the US cannot perform any action to devalue the value of China's stockpile without severely hurting the UK's national treasure and a whole host of other countries' as well. Also, as a percentage of total GDP, China has a smaller percentage figure of US treasuries than the UK. So if China is up the creek without a paddle, we, ladies and gentleman are scr**ed. Let's inject some common sense to future threads about the Chinese economy shall we, instead of just bigotry?

Best,

L

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Chinese economy shall we, instead of just bigotry?

Best,

L

Oh we all knew that but the UK is burgered in any case anyway. Its no longer a GBB gang bang, its become one of those 200 men and one girl bukkake parties and the UK is the recipient :ph34r:

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So, here is what I find myself wondering.

China owns close to a trillion dollars of US debt. I think that is a given?

http://www.washingtontimes.com/news/2010/mar/02/chinas-debt-to-us-treasury-more-than-indicated/

So that looks, bad, the US will have to pay back their debts. China hold the cards, and the US is at their mercy - the Chinese owns Uncle Sam's ass.

But, my understanding is that the debt is mostly treasuries, and as far as banks are concerned they treat treasuries as essentially the same as cash. In fact, banks even prefer to change the ownership of treasuries rather than cash when money is transferred as it is simpler and directly equivalent.

So does that mean that the $800bn of debt held by China is really just the same as China having $800bn of dollar bills?

In which case, it isn't that China owns the Uncle Sam's ass. More that they own $800bn of pieces of paper money?

If so, then what is the problem? The last decade becomes one in which China produced masses of physical goods and transferred them to the US in exchange for pieces of paper? The question is why on earth China went along with that?

Optobear

:lol::lol:

Do you want World War Three.... :lol:

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I always like to give China-bashers some meat to chew on. I suppose we all know that the largest foreign owner of US treasuries is China. Some of us may also know that the second largest owner is Japan. Who knows who the third largest holder is? Yes, you guessed right it's the UK at just over half the amount that China's holding (ref: http://www.ustreas.gov/tic/mfh.txt). There are also many many other countries who hold US treasuries. Now as all US treasuries are fungible, i.e. $1bn of Chinese held US treasuries is by all purposes the same as $1bn of British held US treasuries, it follows that the US cannot perform any action to devalue the value of China's stockpile without severely hurting the UK's national treasure and a whole host of other countries' as well. Also, as a percentage of total GDP, China has a smaller percentage figure of US treasuries than the UK. So if China is up the creek without a paddle, we, ladies and gentleman are scr**ed. Let's inject some common sense to future threads about the Chinese economy shall we, instead of just bigotry?

Best,

L

The Federal Reserve, however, is now the second largest holder of US Treasuries, and has placed a floor under all US Treasury demand. Also note that a lower US dollar helps those countries that are pegged to be more ravenous as exporters, and that it also helps those with large debts denominated in dollars. If you look at UK banking, for example, the dollar debt is in the trillions.

What am I getting at? Well the actual net outcome of dollar decline for any given country is difficult to assess, but in many cases a decline could lead to a beneficial net outcome, when measured against that country's local currency.

Edited by Toto deVeer

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I always like to give China-bashers some meat to chew on. I suppose we all know that the largest foreign owner of US treasuries is China. Some of us may also know that the second largest owner is Japan. Who knows who the third largest holder is? Yes, you guessed right it's the UK at just over half the amount that China's holding (ref: http://www.ustreas.gov/tic/mfh.txt). There are also many many other countries who hold US treasuries. Now as all US treasuries are fungible, i.e. $1bn of Chinese held US treasuries is by all purposes the same as $1bn of British held US treasuries, it follows that the US cannot perform any action to devalue the value of China's stockpile without severely hurting the UK's national treasure and a whole host of other countries' as well. Also, as a percentage of total GDP, China has a smaller percentage figure of US treasuries than the UK. So if China is up the creek without a paddle, we, ladies and gentleman are scr**ed. Let's inject some common sense to future threads about the Chinese economy shall we, instead of just bigotry?

Best,

L

I'm not trying to bash china, more trying to understand why some countries are massive exporters and creditors and why others are importers and debtors. I was a little suprised that you are figuring this is an attempt to bash china because I thought that you could make a decent claim that Germany is the biggest surplus economy historically, and that China is a Johnny-come-lately?

The data about owners of foreign debt is complex, it is difficult for even the FED to know who owns the debt. It may be that the substantial UK holding of US debt is actually holdings of treasuries that occur through London banks but are on behalf of owners elsewhere in the world.

Also, I suspect that if you looked at ownership of UK gilts you'd find a significant ownership by the US - in the form of pension funds and other institutions.

The key isn't really the ownership of debt globally, rather it is down to the trade imbalances that drive the changes in those treasuries and gilts.

This is all about something that has occurred over the last decade - and goes back to the fundamentals of the value of money itself and the way those impact on exchange rates. It seems to me that the Chinese have fixed their exchange rate to grow their export economy, and that the West has acquiesced - but at the price of sacrificing the majority of the manufacturing capacity. Perhaps I'm going too far by calling it the West, what I perhaps mean is the US, UK, Ireland, Greece, Spain. On the other hand I guess there is China, Japan and Germany.

China is a peculiar case, there is very strong governmental control and censorship. The government appear (according to acquaintances who are chinese and live in china) are allowing the creation of a property bubble of epic proportions. That property bubble means that the people are taking on personal debt, and that may be the key point.

When the the US debt is considered, how much of it is government debt, and how much of it belongs to american individuals. Similarly, when looking at debt ownership, how much is the chinese government and how much individual chinese citizens?

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The Federal Reserve, however, is now the second largest holder of US Treasuries, and has placed a floor under all US Treasury demand. Also note that a lower US dollar helps those countries that are pegged to be more ravenous as exporters, and that it also helps those with large debts denominated in dollars. If you look at UK banking, for example, the dollar debt is in the trillions.

What am I getting at? Well the actual net outcome of dollar decline for any given country is difficult to assess, but in many cases a decline could lead to a beneficial net outcome, when measured against that country's local currency.

Wouldn't that only be the case if the country were trying to fund a massively overspending public sector? If Norway, for example, with a surplus finds that the dollar drops in value I can't see how that helps them at all.

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  • 140 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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