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If China Is Selling Us Bonds - Why Would Anyone Want To Buy Them

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Guest vicmac64

US Bonds - what do the Chinese think of them - are they selling them on the quite and if so why???

Could it be because they are just another form of toxic paper???

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My take is that the Chinese are sending a message to the Fed - i.e. if you drop interest rates then the result will be u deflate the dollar and reduce the value of Chinese holdings. So much for the reserves promises to pay the bearer.

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US Bonds - what do the Chinese think of them - are they selling them on the quite and if so why???

Could it be because they are just another form of toxic paper???

with talk of dropping rates in the US and the dollar under strain, the chinese are seeing their cash reserves lose value.

the chinese didn't sell the yanks big tv's, plastic junk and frozen dim sums for nothing, they want a profit.

they will exchange the dollars that are losing value for something more stable or beneficial, ie. gold, wheat, sugar, oil, etc.

yes, the dollar is toxic waste.

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As usual I'm confused.

If China sell off some of their US bonds, which in turn lowers the value of the dollar, won't that have a negative feedback effect on their remaining reserves, i.e. lowering their value?

Unless they don't care, of course.

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The general idea is that if they try to sell them and there are no takers, they will be seen as "the emporer's new clothes" just like SIVs, CDOs, etc.

At that point the Fed will have to buy them back, i.e. monetise them. These bill passes are the technique the Fed normally reserves for adding liquidity. Actually, they normally do it on a slightly smaller scale using coupon passes.

If it has to buy all of the unwanted Tbills and Tnotes, it'll flood the system with dollars, resulting in hyperinflation.

Cue Cgnao (again).

Edited by AvidFan

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As usual I'm confused.

If China sell off some of their US bonds, which in turn lowers the value of the dollar, won't that have a negative feedback effect on their remaining reserves, i.e. lowering their value?

Unless they don't care, of course.

Unless you figure that what their reserves really buy them is a slice of America. Who cares if the dollar is worth the same as the Italian Lira if your devalued $1.3 trillion in reserves buys you the same chunk of American land, industry or debt obligation by its citizens as it does now?

Basically, no matter what they do to the dollar, China's share of America's wealth 'ain't going away. They are owed whatever % of America $1.3 trillion currently buys - and that won't change. Actually, its $2.3 trillion as they also hold $1 trillion in Tbill debt.

That's an awful lot of America. $2.3 trillion would almost buy the entire UK stock market, for example. How do you fancy China owning the whole of the private sector in the UK? All the utility companies, the rail companies, all its manufacturing and service sectors, shops and hotels?

Edited by AvidFan

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Unless you figure that what their reserves really buy them is a slice of America. Who cares if the dollar is worth the same as the Italian Lira if your devalued $1.3 trillion in reserves buys you the same chunk of American land, industry or debt obligation by its citizens as it does now?

Basically, no matter what they do to the dollar, China's share of America's wealth 'ain't going away. They are owed whatever % of America $1.3 trillion currently buys - and that won't change. Actually, its $2.3 trillion as they also hold $1 trillion in Tbill debt.

That's an awful lot of America. $2.3 trillion would almost buy the entire UK stock market, for example. How do you fancy China owning the whole of the private sector in the UK? All the utility companies, the rail companies, all its manufacturing and service sectors, shops and hotels?

Thanks Avid, that's explained it for me.. cheers!

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Does news/opinions like this affect the prospects of a Dollar:Sterling rate correction ? I (uk citizen) am being advised to keep a payment in dollars as dollars rather than converting to £.

Or are we more 'tied' to the US, and news like this is an independant issue.. with a bigger dividing line between eastern currencies & western ones or something. i.e. the dollar is weakening, it's just we'll weaken more to bring our exchange rate in check.

is this a scaremongering blip?

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If you've us dollar denominated liabilities / funding needs etc that your lovely CDOs were matching wonderfully until they turned into a a pile of leaves when dawn broke (to the great amusement of the evil hedge fund fairies who sold them to you) then you may as well pick them up.

Even if you could possibly make a better investment by buying other stuff you wouldn't want the currency mismatching risk. For insurers at least the additional capital you'd need to protect against that would offset any investment gains.

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Does news/opinions like this affect the prospects of a Dollar:Sterling rate correction ? I (uk citizen) am being advised to keep a payment in dollars as dollars rather than converting to £.

Or are we more 'tied' to the US, and news like this is an independant issue.. with a bigger dividing line between eastern currencies & western ones or something. i.e. the dollar is weakening, it's just we'll weaken more to bring our exchange rate in check.

is this a scaremongering blip?

I've seen stories in the likes of the FT that show the pound has more closely tracked the Euro than the dollar over the last few years. It's also regained status as "Queen" of currencies by European central banks - they're holding over 4% of their reserves in sterling now, although this is nothing to the 25% in Euros and 65% in dollars they hold...

The US dollar index is a trade-weighted dollar strength measure that has been plotted for the last 30 years or so. Whenever it has touched 80 before now, it has been at America's absolute lowest economic point in the cycle with recovery due to arrive shortly. Now its at 80 again, however we still have 5 years of sub-prime resets, ballooning trade and budget deficits and an intolerance of interest rates higher than 5% even though inflation due to peak oil will continue to rise. If you take the trade deficit alone (almost 7% of GDP), they say it takes a 10% drop in the value of the currency to correct a 1% trade deficit. So in order for America to start being able to pay off its debts honestly, the dollar would have to fall to 30% of its current value. Schiff is right - the dollar could halve and it could halve again. Also note that the US dollar index has traced out a huge "head and shoulders" over the last 15 years, indicating that, at least technically, it's due for a reverse in trend.

Here in the UK, we have a trade deficit approaching 5% of GDP, so a write down in the pound is coming - the BoE even said so. I don't think it will be the 50% figure required to make us wholly profitable again - but it might be 20% or 30%.

It seems there is a will for the pound to separate from the dollar. I think the whole issue of us having the potential of joining the Euro is being played very cleverly. If the pound was dragged down by the dollar because they are our largest trading partner, we could jump into the Euro at an exchange rate that would favour the UK economy (i.e. we would be cheap-ish, at least to the rest of Europe if not the rest of the world).

There's an argument to say that if the dollar falls, all fiat currencies fall. This can be explained either by taking the simple approach (the dollar is supposed to be a store of wealth, so if a country's wealth reserves drop in value, its currency must fall because each unit represents less "wealth") or in a more causal way, i.e. if our largest trading partner becomes poor, no one can afford to pay for us and our currency will have to fall as a result.

I think western currency write-downs are coming. At the moment, people (including central banks) are too busy playing the yield-game to worry about devaluation. They'll start to worry when peak oil hits, though. Give it a year or so and they'll be buyers of gold I expect.

Cue Cgnao (or indeed GF) yet again...

Edited by AvidFan

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I've seen stories in the likes of the FT that show the pound has more closely tracked the Euro than the dollar over the last few years. It's also regained status as "Queen" of currencies by European central banks - they're holding over 4% of their reserves in sterling now, although this is nothing to the 25% in Euros and 65% in dollars they hold...

The US dollar index is a trade-weighted dollar strength measure that has been plotted for the last 30 years or so. Whenever it has touched 80 before now, it has been at America's absolute lowest economic point in the cycle with recovery due to arrive shortly. Now its at 80 again, however we still have 5 years of sub-prime resets, ballooning trade and budget deficits and an intolerance of interest rates higher than 5% even though inflation due to peak oil will continue to rise. If you take the trade deficit alone (almost 7% of GDP), they say it takes a 10% drop in the value of the currency to correct a 1% trade deficit. So in order for America to start being able to pay off its debts honestly, the dollar would have to fall to 30% of its current value. Schiff is right - the dollar could halve and it could halve again. Also note that the US dollar index has traced out a huge "head and shoulders" over the last 15 years, indicating that, at least technically, it's due for a reverse in trend.

Here in the UK, we have a trade deficit approaching 5% of GDP, so a write down in the pound is coming - the BoE even said so. I don't think it will be the 50% figure required to make us wholly profitable again - but it might be 20% or 30%.

It seems there is a will for the pound to separate from the dollar. I think the whole issue of us having the potential of joining the Euro is being played very cleverly. If the pound was dragged down by the dollar because they are our largest trading partner, we could jump into the Euro at an exchange rate that would favour the UK economy (i.e. we would be cheap-ish, at least to the rest of Europe if not the rest of the world).

There's an argument to say that if the dollar falls, all fiat currencies fall. This can be explained either by taking the simple approach (the dollar is supposed to be a store of wealth, so if a country's wealth reserves drop in value, its currency must fall because each unit represents less "wealth") or in a more causal way, i.e. if our largest trading partner becomes poor, no one can afford to pay for us and our currency will have to fall as a result.

I think western currency write-downs are coming. At the moment, people (including central banks) are too busy playing the yield-game to worry about devaluation. They'll start to worry when peak oil hits, though. Give it a year or so and they'll be buyers of gold I expect.

Wow! Now that's a post! Thanks Avid.

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US Bonds - what do the Chinese think of them - are they selling them on the quite and if so why???

Could it be because they are just another form of toxic paper???

Here in the UK, we have a trade deficit approaching 5% of GDP, so a write down in the pound is coming - the BoE even said so. I don't think it will be the 50% figure required to make us wholly profitable again - but it might be 20% or 30%.

China is a vassal state of the West. Have you taken a look in the shops lately to see how many goods are NOT made in China? Not many? The Chinese are hooked on our consumptiopn of Tat. If we do not buy it who else is going to? They won't sell much to the Japs and the Koreans make their own tat as do the Indians.

History repeats. Its the South China Sea scenario again with the West exploiting their labour to benefit the fat cats of the West. If China tries to get off the "stuff" they have no one else to sell to.

If China go isolationist and stop selling to the West their Yuan will become toxic overnight. The Chinese know this, of course, and that is why they are angry. Hooked again!

With regard to our trade deficit* at 5%--how long will Gordon be able to keep this up as manufacturing continues to contract and as services are shipped overseas? If the US are 7% I can see our trade deficit passing 10% within 2 or 3 years. Economics needs to look outside the box and see long range trends that often repeat themselves every generation.

__________________

Our government deficit is approaching 50% of GDP:

http://www.statistics.gov.uk/CCI/nugget.as...=1&Rank=192

At the end of 2006 general
government debt was £571.8 billion, equivalent to 43.5 per cent of GDP
.
The
UK’s deficit on trade in goods and services was £3.6 billion
in June, compared with a deficit of £3.7 billion in May (previously published as £3.5 billion).
Edited by Realistbear

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With regard to our trade deficit* at 5%--how long will Gordon be able to keep this up as manufacturing continues to contract and as services are shipped overseas? If the US are 7% I can see our trade deficit passing 10% within 2 or 3 years. Economics needs to look outside the box and see long range trends that often repeat themselves every generation.

__________________

The UK’s deficit on trade in goods and services was £3.6 billion in June, compared with a deficit of £3.7 billion in May (previously published as £3.5 billion).

Just to confirm those figures - £3.6 billion a month annualised is £43.2 billion a year, around 4% or our £1.1 trillion GDP.

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Just to confirm those figures - £3.6 billion a month annualised is £43.2 billion a year, around 4% or our £1.1 trillion GDP.

And what percentage of our GDP is housing related? 60-70%?

The 4% figure will not last much longer if our economy sees a contraction in housing as elsewhere in the world. Further, manufacturing and our exports are diminishing and NS Oil will continue to shrink remvoing any hope of the large surpluses that we enjoyed a generation ago.

Gordon's economy is a one-trick pony and we have sold out our source of future recovery with the means of manufacturing having been priced out of business due to HPI. High house prices mean high wages and high wages mean more jobs go overseas. Irleand are now seeing the cost of HPI for themselves as the Tiger economy breaks down under the weight of inflated houses.

My prognosis for Gordon's miracle is terminal I am afraid. If the US are going to catch a cold we are headed for flu, maybe worse. Whenever we point a finger to America we have to remeber that 3 more fingers point back to ourselves. When it comes to debt, at almost any level, we are the champions not just of Europe but of the whole world.

Edited by Realistbear

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Back to the original point. Didn't you see the US treasury yields fall to 2.79% recently.

That seems like plenty of people are buying them, a real flight to credit quality.

I don't think US Bonds are toxic. Unless all US donominated assets are. Any of you aware of the US government planning to default anytime soon?

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And what percentage of our GDP is housing related? 60-70%?

The 4% figure will not last much longer if our economy sees a contraction in housing as elsewhere in the world. Further, manufacturing and our exports are diminishing and NS Oil will continue to shrink remvoing any hope of the large surpluses that we enjoyed a generation ago.

Gordon's economy is a one-trick pony and we have sold out our source of future recovery with the means of manufacturing having been priced out of business due to HPI. High house prices mean high wages and high wages mean more jobs go overseas. Irleand are now seeing the cost of HPI for themselves as the Tiger economy breaks down under the weight of inflated houses.

My prognosis for Gordon's miracle is terminal I am afraid. If the US are going to catch a cold we are headed for flu, maybe worse. Whenever we point a finger to America we have to remeber that 3 more fingers point back to ourselves. When it comes to debt, at almost any level, we are the champions not just of Europe but of the whole world.

RB, I'm not having a pop at your sterling theory. If you check my post, you'll see that I say the pound will be written down - Merv at the BoE has even said so, publically. I do believe the pound is toast in the LONG run - but I'm trying to predict the dynamic that takes us there.

If I could get you to agree the dollar will be written down, I'd then move on and ask you whether you think the dollar will go first or the pound. This is very important. If the dollar goes first, gold will soar and I can decide to trade in (further) to protect myself. If the pound falls first, I won't have had the early warning signal. I do believe the dollar will fall first, not the pound.

You have to see that in predicting this dynamic, I have taken in to account the fact that we have more scope for IR rises in the short term (up to 1 year) which will strengthen the pound and be seen as an inflation counter measure. And although the UK housing market WILL crash NOW without further IR rises, it would happen slowly - no one would notice with annualised statistics. I think, therefore, IRs could be hiked a few times before we get a disasterous fall over a relatively short period (like America). Ater all, we've only gone from 3.5% to 5.75% rather than from 1% to 5.25%.

Regarding our national debt, yes, we are at 50% of GDP which is much higher than America. But in which direction is that debt going, and how fast? People are playing the short-term YIELD game at the moment. The UK with a 4% trade deficit still looks viable for the moment (agreed it will worsen quickly when the housing market starts to collapse in earnest) whereas America's doesn't.

I think I'm arguing about the order of events here. I believe it will be America first (most severe in terms of currency devaluation and loss of wealth), followed by the UK, giving us time to "get out" of sterling.

With regard to the expectation that America will default. I don't think "default" is a concept America understands anymore. It doesn't matter how much you owe if you can just change a figure on a computer somewhere and pay off a TBill. But the point is, if inflation is critical and IRs cannot be raised, will they monetise the debt leading to even more inflation or refuse to pay? You have to think what they will do to ultimately save themselves.

Edited by AvidFan

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RB, I'm not having a pop at your sterling theory. If you check my post, you'll see that I say the pound will be written down - Merv at the BoE has even said so, publically. I do believe the pound is toast in the LONG run - but I'm trying to predict the dynamic that takes us there.

If I could get you to agree the dollar will be written down, I'd then move on and ask you whether you think the dollar will go first or the pound. This is very important. If the dollar goes first, gold will soar and I can decide to trade in (further) to protect myself. If the pound falls first, I won't have had the early warning signal. I do believe the dollar will fall first, not the pound.

You have to see that in predicting this dynamic, I have taken in to account the fact that we have more scope for IR rises in the short term (up to 1 year) which will strengthen the pound and be seen as an inflation counter measure. And although the UK housing market WILL crash NOW without further IR rises, it would happen slowly - no one would notice with annualised statistics. I think, therefore, IRs could be hiked a few times before we get a disasterous fall over a relatively short period (like America). Ater all, we've only gone from 3.5% to 5.75% rather than from 1% to 5.25%.

Regarding our national debt, yes, we are at 50% of GDP which is much higher than America. But in which direction is that debt going, and how fast? People are playing the short-term YIELD game at the moment. The UK with a 4% trade deficit still looks viable for the moment (agreed it will worsen quickly when the housing market starts to collapse in earnest) whereas America's doesn't.

I think I'm arguing about the order of events here. I believe it will be America first (most severe in terms of currency devaluation and loss of wealth), followed by the UK, giving us time to "get out" of sterling.

With regard to the expectation that America will default. I don't think "default" is a concept America understands anymore. It doesn't matter how much you owe if you can just change a figure on a computer somewhere and pay off a TBill. But the point is, if inflation is critical and IRs cannot be raised, will they monetise the debt leading to even more inflation or refuse to pay? You have to think that they will do to ultimately save themselves.

I do not think you are far off the mark with this. I have always held that in relation to sterling the dollar is more likely to rise than fall--in the medium to long term. That said, I also feel the Euro is not long for this world due to imbalances and dependency on Germany to carry the others.

HPC are not normally gentle events either here or in the US. Especially given the fact that our housing market is backed by subprime and other forms of volatile financing. The US, on the other hand, has a far more stable mortgage market with the majority of the loans falling into the "conforming" category that includes fixed rates over substantial 15-30 year terms. The UK market has very few long term fixeds and it will only take 5% or less of the market to default to contaminate the entire pot as it were. We have no yet begun to see the resets that were the trigger for the crash in the US. Dr. Bubb, probably accurately, points out that there is a substantial lag between the US and UK of about 18 months.

My concern is that so many tend to point to the problems in the US without realising that they are magnified both here and in the EU. The level of printing money in the UK is alarming (13%) and the ECB are in a similar mode. Much is made of the fact that the US is dependent upon Chinese imports as if the shelves were stocked with home made goods in the UK! IMO, there is an underlying anti-American sentiment that probably stems from the misconception that the US and Big oil (Total, Royal Dutch Shell, BP and Exxon)* are out to colonise the middle east. The Jihad mania is, IMO, a cover for the vested interest in the Arab lands to keep the masses controlled while the Mullahs and Sheiks enjoy elaborate lifestyles of the rich and famous (an extremely common tactic used by power elites down through the ages).

The president of Iran, for example, has a fondness for white Armani suits and Jermyn street shirts which he wears open necked as if he was the 21st Century answer to John Travolta. The big oil companies are not colonising the Arab nations but lining the pockets of the ruling elite with a lot of money which is not being invested in the common people in the form of education, hospitals and so forth. HOuses in Qatar have even been shown on our property porn TV! By maintaining the idea that the West is out to colonise the Arab lands the Sheiks and "Holy" men keep them from focusing on the palaces and Bentleys enjoyed from all that oil revenue (that is, "revenue" not payment).

___________________

* Big oil is, of course, not a uniquely US entity these days. Multinational companies dominate the oil scene and some of the biggest players are non-US based corporations. Perhaps the largest in the world will soon be the Soviet Gazprom as they "eliminate" the competition through nationalisation and blackmail.

Edited by Realistbear

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Guest wrongmove
Back to the original point. Didn't you see the US treasury yields fall to 2.79% recently.

No! Last I looked they were 4-5% depending on duration. Do you have a link for 2.79%?

That seems like plenty of people are buying them, a real flight to credit quality.

I don't think US Bonds are toxic. Unless all US donominated assets are. Any of you aware of the US government planning to default anytime soon?

They wont default - that would be stupid. The fear is, they simply print the money, and pay back in rather worthless dollars what you paid for in uninflated dollars.

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