US Treasury Secretary Tim Geithner and Secretary of State Hillary Clinton will host Vice Premier Wang Qishan and state council member Dai Bingguo in Washington on July 27-28.
The U.S. sells a record $115 billion in bonds and notes this week, starting with 20-year Treasury Inflation Protected Securities today (July 27) to be followed by $42 billion in two-year notes tomorrow, $39 billion in five-year securities on July 29, and $28 billion in notes maturing in seven years on July 30. The previous record was $104 billion in two-, five-, and seven-year debt sold the week of June 22.
The on-going "difference of opinion" of China and the US on the "trade question" is threatening to levitate to a more exciting level. If China had not kept its currency pegged artificially low to the US dollar, we wouldn't have bought as many consumer goods from them, and they wouldn't have so many dollars in US Treasurys to worry them. Now they may want us either to guarantee repayment in their currency--convert their US bonds into yuan--or they won't take any more bonds. This is the standard democrat analysis of the issue, and the democrats rule Washington. But the current image of the democrats abroad is one of ignorance and amateurism at best. So the Chinese are coming to test those perceptions.
Not taking more of our bonds, or not even rolling over current holdings, brings up the issue of what the Chinese will or can buy instead. They have been flooding their own banks with a mammoth stimulus, and they have been buying huge stockpiles of commodities (some, perhaps much, privately, to be sure), but what else can they do to spend down their trillions of Treasurys without moving markets adversely for themselves as well as others?
Do they expect us to change the bonds to payment in yuan and then watch them revalue the yuan upwards? Or do they expect us to devalue the dollar ourselves explicitly or via gradual monetization of all the required Treasury debt sales leaving them with 50% on the dollar in bonds? It's not what one would call a "win-win" situation for either party in these discussions this week.
The US weak place is that someone has to buy the trillions of bond, note, and bill offerings for the next decade unless we plan to downsize the national government dramatically, and that is not in the democrat plan. If we anger one of our best customers for Treasurys, we might have a problem, but so will the customer have a problem if their exports fall even further and their stimulus package doesn't create an instant consumer economy in China.
In either event, it's questionable whether the fear of deflation will continue to provide alternative buyers for the accelerating sales of Treasurys. We both and all have a problem.
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