I was asked this question on the blog yesterday:
Would a mass sell off of US Treasuries by EU and others put pressure back on Trump and his Congress?
Since it is doing the social media rounds, I gave this question some thought and responded as follows (with some editorial improvements on reposting):
Yes, it could, but the chain of effects is indirect and politically messy.
A mass sell-off of US Treasuries by foreign holders would, all else equal, push Treasury prices down and yields up. That would tend to:
- Increase US government interest costs, especially on new issuance.
- tighten US financial conditions, meaning higher rates across the mortgage and corporate debt markets, and
- Unsettle risk markets.
All of that would create political pressure on any administration, including Trump's. However, there are big caveats.
First, Treasuries are the world's core safe asset. In a true panic, many investors often run towards Treasuries, not away from them. So coordinated foreign selling could be partly offset by domestic and global private buying.
Second, the Federal Reserve can stabilise yields through purchases, using measures such as QE, if it chooses. The US, as the issuer of the dollar, cannot be funding-constrained by dollar-relatedissues.
Third, foreign holders selling Treasuries are also harming themselves: they either crystallise losses or they must find an alternative reserve asset of comparable scale and liquidity, and there is none at the same depth at present.
So, foreign sales could signal diplomatic and financial disapproval and cause disruption, but they are not a reliable weapon that would force Congress to change course. It would create pressure mostly via higher rates, market volatility and a weaker dollar, but the US has unusually strong tools to absorb that pressure, meaning the measure might not work.
I do not buy this argument as a result.
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Very much agreed. There is a better way to hit the interests of the USA and that is to go to a UFT tariff and quota system with respect to the USA. Socialism has killed millions in the 19th and 20th century but crony capitalism has killed far more and when Americans see their subsidies to Europe meaning that their production preferentially gets exported then it will mean that they can’t eat. Combine that with their tariffs on imports raising their own prices and unemployment levels and it will really hurt.
No-one wants to see 300 million Americans starving in the street of course, but that’s their problem and an easy one to resolve. It’s our problem to ensure that a 1916 Treaty affecting 57,000 people being a colony of our Danish friends continues to be honoured.
Might it be more effective to have a large-scale, coordinated move away from the dollar for oil sales?
Granted, it didn’t work out well for Iraq/Libya/Venezuela when they tried it individually, but if a sufficiently large bloc could be achieved, this could be hugely disruptive.
I don’t think bg oil is where we should be looking for support. We’re stuffed if we do.
Agreed. “Big Oil” would definitely not be supportive, since most of these are either US-HQ’d or have large US exposure. It would take governments to mandate the change.
“Treasuries are the world’s core safe asset. In a true panic, many investors often run towards Treasuries, not away from them. ” are”? … or “were” – that is the $10 trn dollar question ($10,000,000,000,000 – a lot of zeros) which roughly speaking is what foreigners have invested in US Treasuries.
Co-ordinated, public action by foreign governments seems unlikely. First, they each have different agenda and, to some degree, competing with each other; second, such a public act invites retaliation. There was a suggestion that Canada, Japan and China were selling USTs earlier this year as a “warning shot” in the tariff negotiations but even if there was selling (and there was) it is unclear whether it was official holdings or private sector holders…. and if it was official holdings it did not appear co-ordinated.
I think we are more likely to see something akin to the collapse of the gold standard. Everyone realised that the gold standard was unsustainable given the Vietnam war and the huge hike in oil prices… but they also realised that to demand gold for dollars would usher in an era of instability so everyone stayed put. Until the French broke rank and demanded gold… at which point it was all over.
I think this is what is sustaining the dollar (and USTs) now…. but if someone breaks rank and sells dollars it will be brutal. Defence implications have, historically kept Japan, South East Asia and Europe in line but that might be changing. Also, even if official institutions stay wit the dollar the private flows could still do it.
Can a sell-off of US treasuries actually be possible?
The (simplistic) train of thought is as follows:
The mechanism of currency creation sees a government deficit (negative equity) become a private asset (positive equity) which at the macro level becomes an increase in the reserve accounts of the commercial banks at the Federal Reserve.
The issuance of US treasuries is not necessary for the operation of the US government. However, the US government can set interest rates to whatever it desires by issuing treasuries with an interest return into the primary market.
US treasuries are primarily bought by commercial banks to get an unearned return on the funds in their reserve accounts. The ultimate ownership of the treasuries is those individuals who desire a risk-free return on their savings and will be both US citizens/commercial banks and foreign citizens/central banks.
Is a sell-off possible? If no-one wanted to hold US treasury bonds, then there would be a reserve account balance of the sum of all accumulated government deficits. The entities once holding bonds would instead hold positive cash balances in their accounts. So bonds would be sold-off or reduced but holdings of US dollars would remain – i.e bonds can be sold-off but US dollars can’t.
Is it possible to exchange US dollars for foreign currency? Of course, but only if a foreign entity (usually a foreign central bank) wishes to hold US dollars in its portfolio – so is that really a sell-off?
The only way a foreign owner of US dollars/treasuries can get rid of the dollars is if the foreigner uses the US dollars to buy US products for foreign use (ie run a trade deficit) until there is balanced trade – imports equal exports. This dilemma can be removed systemically if all trade is conducted in a trade reserve currency like Keynes’ Bancor or Varoufakis’ Cosmos.
In summary, treasuries can be sold-off but US dollars can’t. They can only be traded away.
Ironically, if China wished to buy US goods and reduce its holding of US dollars, it would make America great again!
Thanks – very clear.
“This dilemma can be removed systemically if all trade is conducted in a trade reserve currency like Keynes’ Bancor or Varoufakis’ Cosmos.”
OK – a Bancor or a Varoufakis Cosmos both missed their moment as a global alternative. But what if, in the current disorder, Canada, Aus, China, Japan, EU, UK did the preparation for some alternative, coexisting mutual system of exchange? Could that begin a progressive transition away from the US Dollar as global reserve currency? So not ALL trade, but rather a steadily increasing proportion of it, alongside a depreciating dollar? Perhaps markets would be kinder to bonds of governments in that system and less likely to panic?
Yes, in a word.
BUT remember, Bancor was not for trade as such: it was for inter-central bank clearance.
Well, US Treasuries are selling off; yields are up 15bp since last week. Whether the selling is coordinated European government action I doubt…. but is the start of a bigger move?
S+P futures are down close to 2%, the dollar is down 1%+ and the gold price is going bonkers. Interestingly, Bitcoin (the tech bros gold) is down.
Now, having called 5 of the last 2 market crashes my track record ain’t great…. but this feels ominous.
You are ahead of me this time.
Richard,
I 100% disagree with you. I think a treasury bond strike on the part European countries and investors might be very effective. While the United States treasury certainly has many tools in its toolbox to counteract it, you are discounting the immense in confidence and corruption of the Trump administration to actually carry out these policies in an effective way. And, I don’t believe the federal reserve can save the situation because they are going to be under the Trump administration thumb as well.
I currently am 100% in cash and feeling very comfortable detective decision. Particularly from what I see going on with Greenland.
Wouldn’t a ‘treasury bond strike’ (= co-ordinated sell-off) be as damaging for the Europeans as it would be for the US, for the reasons that Richard pointed out – far too much interdependency, and subsequent instability? It’s a nuclear option. Cash is indeed a good place to be right now, but the slide downwards may be slower.
Instead, China, Europe, Canada, Aus, UK and BRI(C)S could avoid USD for FUTURE non-US trade and reserves whever possible – denominated in Euros, Renminbi or whatever. Might there even be work on some alternative governance and mechanism will be established to progressively build collective ‘depth’, manage international clearing and handle currency imbalances fairly? Surely now there is enough of a crisis for the prep work to be started properly? Has Carney proposed anything concrete?
Or are we back to waiting for a de-facto gold standard, some more QE or Trump issued crypto-nonsense to appear as a magic ‘asset’, a raft of tariiffs and a global recession?
Re your last para: that would be madness.