I’m reluctant to even dignify this with a post, but in light of the worsening tensions between Washington and Beijing and also in the context of the ongoing “Is China a currency manipulator?” debate, it bears mentioning.
This will be purposefully brief.
On Saturday, speaking to reporters on the sidelines of the IMF annual meetings in Bali, Indonesia, Treasury Secretary Mnuchin again downplayed concerns about China dumping U.S. debt as a means of punishing the Trump administration for the Peter Navarro-inspired aggressive stance on trade.
After condescendingly noting that China is “free to do what they want to do” with respect to the composition of their reserve holdings, Mnuchin went on to brag about just how compelling U.S. debt is as an investment opportunity.
“We have plenty of buyers for Treasuries”, Steve said, adding that when it comes to his own interactions with China, the prospect of Beijing liquidating Treasurys “has never come up whatsoever.”
That, frankly, is a lie. Even if Mnuchin is telling the truth with regard to China having no intention of selling its Treasury stash, the idea that the subject has “never come up whatsoever” is patently absurd. If nothing else, it’s at least come up in the context of market rumors, even if only for China to dispel the notion.
“I hope [China] thinks it’s good to hold U.S. assets”, Mnuchin continued.
To be sure, it is obviously “good” to hold U.S. assets, because after all, they are denominated in the world’s reserve currency. But from the perspective of whether now is a good time to hold those assets, you’d be forgiven for suggesting that there has never been a worse time.
After all, this is an administration that has decided to balloon the deficit in the interest of piling fiscal stimulus atop an overheating economy, a move that is effectively forcing the Fed to hike that same economy into a recession. Why in God’s name would you borrow to fund stimulus at a time when the unemployment rate just hit a 48-year low? Just look at how anomalous this is:
And by virtue of the fact that this very same fiscal stimulus has effectively exhausted the nation’s capacity to pull fiscal levers to offset the next downturn, it will invariably fall to monetary policy to support the economy when that downturn finally materializes.
So, the read-through for U.S. debt is that during the next recession, prospective investors will be asked to buy debt issued by a country in worse fiscal shape than Italy against a backdrop where that country’s central bank is cutting rates.
Throw in the fact that America is now run by a man who spends his time lambasting the country’s central bank as a “crazy”, “loco” gang of unpatriotic traitors, and the investment pitch for U.S. Treasurys has essentially morphed into this: Would you like to buy some debt issued by a banana republic?