There was a disturbing data release late last week on the crucial U.S. Treasuries market that keeps the American Federal government funded and affects interest rates for all of us. Data from the Treasury Department revealed that the Russian’s U.S. Treasuries holdings had fallen off a proverbial cliff.
Since March, the Russian-held U.S. debt total crashed by 84 percent. Between March, April, and May, the dollar totals declined from $96.1 billion to $14.9 billion in a total of only two months, per the United States Treasury Department report they released on July 18th.
There was a time that Russia’s government was actually a large holder of Treasuries. Something has changed though. They have been consistently and aggressively selling off the overwhelming majority of their U.S. debt holdings.
Now Moscow has ceased to be a major holder of American debt. Both China and Japan each individually count over a trillion dollars of Treasuries as assets. The two countries are active managers of their own currencies. China holds so much of the U.S.-denominated debt that economists have nervously pointed to their ultimate ability to destroy the U.S. government’s borrowing capabilities and dollar value simply by using their so-called “nuclear option” to dump their American debt.
This is a real fear as the American-Chinese trade war unfolds. The entire American economy is a prisoner to this power that the Chinese wield to drive up American interest rates. Consider that the significant international U.S. debt owners have $6.21 trillion in current American debt. This compared to a total of $21.3 trillion total debt on July 26th.
It means that China possesses something like around five percent of all outstanding U.S. debt. This may not sound like a huge amount. If they were to dump it all in one sudden move, it would create a massive oversupply of Treasuries.
This in turn drives up interest rates at the same time as it drives down the value of Treasuries. It can easily lead to a chain reaction in which domestic investors and international debt holders all feel that they should sell their own Treasuries to in an effort to “stop the bleeding” of their Treasury losses. The next thing you know, interest rates could easily double in a matter of days.
If you want proof of this in action, consider what happened when Russia actually dumped their $81.2 billion in Treasuries. The Russian “debt bomb drop” just so happens to have coincided with an inexplicable jump higher in Treasury yields. It only took roughly $80 billion in hastily dumped Treasuries for the benchmark 10 year notes to reach their highest levels in seven years (since 2011).
Imagine what will happen when the U.S. make China angry enough to try flushing ten times that many Treasuries down the proverbial drain. If you think the Chinese would never do such a thing (as it would be shooting themselves in the foot while their own holding values were decimated) you do not know the Chinese.
Read Sun Tzu’s Art of War, a veritable manual on how to deal with your enemies that the Chinese still highly regard and all study. Then you will understand how their civilization has lasted so long and thrived successfully for over 6,000 years of history. God help us all if they really do turn against the U.S.
Is Your Retirement Portfolio Protected from A U.S. Government Debt Bomb Drop by the Chinese?
The sad truth is that in a longer-term economic war with China, we simply do not have a prayer. The Chinese have their nuclear option and can wreck the U.S. government’s finances past repair in a matter of days if not hours. Imagine how the U.S. would pay the interest on $21 trillion in debt if interest rates only doubled to a historically normal level of five to six percent tomorrow? No one can not beat China at their own game. All that you can do is to protect your retirement portfolio from their potentially game-changing plots and schemes against the U.S. economy and national finances.
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