When the Bubbles Come Home to Roost

In arguing that it was impossible for China to “dump” their Treasuries (Who’s Dumping Treasuries?) we made these points:

  1. The total nominal value of their Treasury holdings (The table MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES) were – and remain – greater than the currency in circulation (Table 8 of the H.4.1 statistical release). In other words, there is not enough money to pay them for their Treasuries.
  2. The reason they hold Treasuries is that they held the equivalent amount of USDs that paid them nothing. Selling Treasuries simply gives them back the USDs they didn’t want.

Well it turns out that they now have a need for USDs so in June, the last month for which we have data, they sold some 20 billion of treasuries. We may now expect more sales because global liquidity issues – remember that the USD is the global reserve currency – are rising as foreign currencies are in chaos and many countries are experiencing runs on their pools of foreign reserves, read: Emerging market rout is too big for the Fed to ignore.

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