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Minyan Mailbag: Treasuries



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

Dear John,

It seems to me it makes perfect sense that the Chinese and Japanese wouldn't add to dollar holdings when the dollar strengthens vs. their currency. They don't need to.

I don't know who the Caribbean buyer is, but I'm not sure it matters. As long as inflation is under control and interest rates are low, this game can go on indefinitely.

I would like to see some basic honesty and integrity in our monetary and economic system. I'm just not sure it's coming anytime in the foreseeable future. We've been completely detached from gold for over 30 years. I see nothing on the horizon that will change our current system of fiat manipulation.

Enjoy your thoughts,
Minyan Jim


I am on record saying that as long as the long bond does not decline this game can go on indefinitely.

I thought once Japan and China slowed down their purchases of our government debt, our rates would rise and the game would be up. This has happened, but the long bond continues to rally. Why? Because buying out of the Caribbean has replaced Asian buying: the Caribbean is now the third largest holder in the world of our debt.

Who is it? Some may say it doesn't really matter as long as it works. But I think it matters if we are going to determine if it will work for long periods.

Let's just say for fun this buyer is the Fed disguised as a hedge fund (plausible if unlikely). It becomes more likely in my mind because of the just so happens someone was there just at the right time?

If it is the Fed that means they are worried about long interest rates rising and killing an over-levered economy. So they can print dollars and buy our own debt. Can they do this forever?

What if Japan and China and everyone else realizes they are doing this: printing dollars to buy debt. Who is going to want to hold our debt? Can the Fed buy the entire float of government debt if everyone wants to sell? This is tantamount to dropping dollars from helicopters.

Prof. Succo

Appreciate the thoughts John.

I think, as you suspect, that it is the Fed buying treasuries and probably other securities strategically. They will monetize whatever is necessary to keep the game intact.

I think that's a given. Now the tough part is to figure out what impact that has. Monetization through the printing press is inflationary. However if it merely offsets the natural deflationary pressures in the economy, then it may not matter.

So what could derail this arrangement? A loss of confidence in the dollar causing imported inflation to get out of control. I think we can assume interest rates aren't going up significantly. The Fed will make sure of that. I think even if inflation moves higher, the market will be scratching their head about the conundrum of low interest rates. I think the Fed is actively managing the entire treasury yield curve.

At some point I think this will blow up. As far as I can tell, it will likely be a dollar currency crisis. To me, I can see it developing rapidly and without a lot of warning.

Minyan Jim


You and I agree.

Once the market realizes the amount of intervention that is going on, market forces should overwhelm the central banks' attempts to "whitewash" the situation: untenable imbalances between trading partners. If compression (the attempt to subdue market forces) is as high as I think it might be, this unwind could occur quickly.

From what I have read, Paul Volker is worried as well.

Prof. Succo

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