Last week, we wrote about the impossibility of China nuking the Treasury Bond market… Really, this is not about China but mostly about the nature of the dollar and the structure of the monetary system. We showed that there are a whole host of problems with the idea of selling a trillion dollars of Treasuries:
- Yuan holders are selling yuan to buy dollars, PBOC can’t squander its dollar reserves
- If it doesn’t buy another currency, it merely tightens monetary conditions in China
- If it does, it will drive up the price of whatever it buys, but crash it when it sells later
- It is still supporting the dollar, as the euro is (like the yuan) a dollar-derivative
- It would lose money by holding the positon, due to the interest rate in the euro
- It incurs severe exchange-rate risk (the euro is in a downtrend against the dollar)
- And the debt of Spain, Italy, and others is headed for a train-wreck