Are We Ready For Economic War With China?
Just heard on CNBC that some administration idiot (a Mr. Chu, who ought to know better) has stated that they want a tariff on Chinese goods carbon content unless the Chinese enact a carbon tax or cap & tirade scheme like the one the Obama regime is pushing.
The Chinese, as they are wont to do, have played the economic blackmail card of “Maybe we don’t need quite so many U.S. Treasuries…” Since they are the only major funder of the U.S. Debt at this moment, and we need lots more funding, this is very important.
All the Chinese need to do to spike this administration is stop buying U.S. Treasuries. The Chinese are the cash flow engine presently supporting the U.S. Debt, and they are nervous about it anyway; but to summarily stop buying would have been, to their mind, an aggressive act likely to trigger retribution. Now we’ve given them a ‘casus belli’ to do whatever they want. We insulted first. (And the Chinese are extraordinarily sensitive to any whiff of neocolonialists telling them what they must do…)
Financial Death of 1000 Cuts
Do we have no one in the government (under either party) who has a clue how international economics and geopolitics work? If I were the Chinese Premier, right now I’d be telling my aparatchik mandarins to start a gradual “death of 1000 cuts” on U.S. Treasury purchases.
Slowly sell down what they hold starting with longest maturities and turn all new purchases into very short durations. Keep a slightly reduced U.S. Treasury buy rate (so no one can say you have stopped) but pull the average maturities in to 1 or 2 years. Then all you need to do is wait a year to be ‘sold out’ via maturation.
Basically, change the 1st and 2nd derivative of the treasury accumulation rate via maturity adjustment. They hold near a $Trillion of U.S. Treasuries and Agency bonds (and you don’t change that up front), just change the rate of accumulation of ‘years of debt’ and the ‘acceleration of years of debt’ by moving the years in, not the dollars. This makes it easier to pull the dollars home later since any change in interest rates (from excess supply) has little impact on short term paper and a much larger impact on long term paper.
Presently the mix of 10 to 30 year bonds gives them a 10 to 30 year marriage to the U.S. Treasury. They can cut out, roughly, 95% of their exposure to rate shifts (how bond price changes show up) by moving the maturity to an average 1 year instead of an average 20.
I would expect that within 2 years max, 1 year if they really hustled, they could hold no paper longer than 2 years maturity and with an average maturity of 1 year. It would be hard to get it shorter than that. Folks notice if you churn from bonds to bills. The swap from a 20 year bond to a 10 year bond or from a 5 to a 2 is not noticed much, swap to a 90 day T-bill from a 20 year bond, it stands out…
It would not be hard to sell $100 million of mixed 20 and 10 year bonds in one agency while buying a mix of 10s and 5s in another and hide the swap down from 20s to 5s. Then repeat that with 10s, 5s & 2s. Then with 5s, 2s, and 1s and you are done. Now all you need to do is stay silent for a year or two… about as long as it will take for congress to pass all the laws they are jawboning…
If I can think of this, they have already thought of this. “Pulling in the maturities” is a standard behaviour if you are not sure about the reliability of the party issuing the debt or the soundness of their currency going forward.
Why does this matter?
Protectionism and tariff wars were part of what caused The Great Depression to become so deep and prolonged. The last thing we need right now is a trade war with China (which we would lose) forcing them into internal stimulus (which would only make them stronger) and us into hyperinflation – which is where we will be with ‘spending as proposed’ along with our present nonexistent production of wealth; if not sterilized by bond sales.
(“Sterilization” is the process that takes the inflationary impact out of money injections. In simplified form, you get someone who has dollars to hand them over as a loan – sell them a bond – rather than just ‘print more and spend’ which injects direct new cash into the economy and leads to inflation. This kind of thing is what central banks worry about.)
Oh, and with darned near every manufactured thing you buy bumped up by 10% to 20% via a tariff there is a direct and immediate bump in inflation. Try, just try to find physical goods in the store not marked “made in China”… Then add to that the price bump on all the things not marked “made in China” but containing Chinese parts or materials (like all the cat food and milk powder that was in the news in the last year or two for toxic contaminant issues.)
The End Game
And just what would happen to the U.S. Treasury when a $Trillion of bonds and Agency bonds matured and the money was not ‘rolled over’… They would have no choice but to print money, and stoke inflation ( I don’t see any other “sucker” ready to step up “in size” to fund the congressional credit card…) It would not be pretty.
Unfortunately, the Obama administration being zealots on the carbon issue will find that issue non-negotiable. The economic reality of a China, unfettered in its coal use, as our economic competition, being guaranteed “a win” will at some point set in (it looks like it is happening now). Rather than taking the rational decision to avoid the crippling carbon taxes, the only choice the administration will find acceptable is to strong arm the Chinese – and that will be a disaster. World wars have started over less, and world economic melt down has been caused by exactly that type of activity in the past.
I can only hope ether the administration gets a clue or the Chinese are not very upset. Neither looks to be true.