(Bolding added to indicate what I’m responding to.) But presumably nothing would stop this hypothetical receiver from rolling over the Chinese-owned U.S. Treasury bonds; that is, buying new bonds with the funds from the old bonds maturing.
(1) Consider who appointed the receiver. 
(2) Less cynically, the receiver, like any trustee or guardian for a client unable to consent, would have fiduciary duties to (a) not simply hold the proceeds of matured bonds as cash but (b) not take undue risks on behalf of the non-consenting client. What financial instrument does that sound like? 
If it gets up to 5% for a one year or even five year bond, all of us old farts who remember getting 5% on passbook savings will be snapping those puppies up. The same with any Chinese-owned bonds that are selling at a discount of 5%.
Of course we’ll gripe about how this means that there’s sure to be inflation, but we’ve been through a couple of inflation cycles and 5% beats 1.5% all hollow, if it’s our investment we’re talking about.
What happens if China sells the assets to a third party? Let’s say, as a hypothetical, that China invades Taiwan and the United States sequesters all Chinese assets in the United States until China withdraws its troops from Taiwan. China refuses and the interest payments from American bonds start collecting in some account.
And then China sells all its bonds to Saudi Arabia. The Saudis didn’t invade Taiwan so the United States has no political reason to hold Saudi assets. Do they turn over all of the Chinese money it was holding to the Saudis? Or do they declare that China didn’t have the legal right to sell the assets and they’re going to keep them until a settlement is reached?
I can see both sides of this. On the one hand, why should a neutral country be held responsible for some action it didn’t do? But on the other hand, allowing the sale of frozen assets makes freezing them a hollow gesture.
But in a world where China is about try to tank the US economy by dumping all its t-bills, we’re already in a world of significant economic dislocation. I doubt we go from a standing start of today’s world and suddenly tomorrow there’s economic warfare between the US and China. Shit would have to be going down already that would make the t-bill debacle just one more in a long long list of unpleasantness.
If we’ve frozen the assets, we’re not going to turn them over to the buyer–that’s what freezing the assets means. The putative buyer knows the assets are frozen, so they aren’t going to buy them until they’ve been unfrozen. Or if they do buy them, they’re buying them on spec, to be delivered when or if they get unfrozen.
I doubt Saudi Arabia is going to send billions of dollars to China to buy assets that may or may not ever be released, unless it’s for literally pennies on the dollar.
It sounds like a bond issued by a sovereign which is not the United States, doesn’t it?
WOW! You really should go and take an economics class before you try and comment about stuff you clearly have no clue about.
Then tell me. Obviously from your quotes, you think that China selling 1 T of US debt wouldn’t increase massively the interest rate of US bonds.
So, tell me why I’m wrong and how you think it would affect the interest rate.
Pursue the thought experiment. The People’s Bank of China now has $1T sitting in its checking account. What happens next? Does it ask for banknotes and stuff them under its mattress?
That’s just fighting the hypothetical, again. Which was : China sells its US debt overnight, does it crash the US economy?
Say, China buy the whole global reserves of peanuts and grapefruits. Does it help? What does it change wtr the US interest rates?
I just checked, and apparrently the US treasury sold 135 billions of bonds during the first quarter of 2014. So, the Chinese sale would seemingly amount to ten quarters of US emission. How this could conceivably not send the interest rate through the roof?
The value of debt instruments or any security for that matter, is not determined by one party. It is determined by two parties…a willing rationale buyer and seller. Even if China decided to dump it’s US debt that it owns, another party would gladly pay that price, hell even the US government would probably be willing to buy them back at such deep discounts that you propose. The credit worthiness of the US, which is really the determinant of the value of the US debt, in your example is unchanged. Just because an irrationale seller decides to dump a security, all other rationale players in the market, would just take advantage of that seller. The debt would ultimately trade back to the price between two rationale players. In your example the only party that loses is China.
Yes. The F.R.B. purchased U.S. debt at a rate of nearly $1 trillion per year during the height of its QE programs. It could buy another $1 trillion suddenly. The key question is: What would be the market reaction going forward? This leads to the question: Why does China sell the bonds, or why does the market think it does?
This is why I asked: What will the People’s Bank of China do with its newly issued U.S. dollars? If it puts them under its mattress, I think China’s economy would suffer far more than U.S.'s If instead it, say, uses them to push down interest rates in Japan, I think Japan’s investors would be happy to buy U.S. bonds back.
And it buys them with dollars. Those dollars got to go somewhere. If they don’t end up under a mattress, they’ll end up buying U.S. debt or assets.
I’m not strong in economic matters, but I’m not seeing why China suddenly selling all its T-bills would crash the market or hurt the US’s ability to issue further debt.
The value of those bills is determined by the market’s assessment of their security. How much are they worth?
Those bills are backed by the full faith and credit of the US government. It doesn’t matter who holds them, their value is that the US government has promised to pay, when they come due.
If the Chinese dump all their holdings, they’d be putting a valuable commodity on the market. It might temporarily affect the market price for those bills in the secondary bond market, but the fact that China has decided to sell the bonds doesn’t mean they’ve lost their value as a bond backed by the US. If investors still have confidence in the US’s government’s promise to pay, why would it crash the US economy? Bond traders would buy them at a discount, because the market is temporarily over-supplied, at China’s expense.
Wouldn’t selling them en masse simply hurt China? It’s bought at the face value, and now is selling at a discount, ie a loss.
Ding Ding Ding…winner winner…chicken dinner.
Well…close.
The fact is that China - or anyone, really - dump a metric ton of T-bills, bonds and notes on the market at once WOULD damage the ability of the US to issue further debt. But the response to this is simply that the next round of US debt would have a higher interest rate to increase the demand for it. By any measure this would count as ‘making it more difficult to issue another series of debt’. But the effect wouldn’t be huge.
On the other hand, should China actually get all those dollars and hide it under their collective mattress, that would be GOOD for the US. Issuing all those dollars and determining never to spend them is like getting things for free. Or at least it’d be anti-inflationary. The US would get the benefit of the debt without the money supply actually being increased.
I know a couple things about economic matters, and your post is excellent. So much so that it’s worth quoting in full (again).
This cuts right to the heart of short-term liquidity concerns vs long-term fundamentals.
The US Treasury market is the most liquid in the world, and the fundamentals of the US government’s ability to pay remain unchanged by the capricious portfolio decisions of other nations. It would definitely affect the price, but the market shouldn’t take too terribly long to swallow and digest the shift. As already mentioned in this thread, the Fed itself has swallowed trillions.
And yeah, our hypothetical China would take a loss on their sudden sale. They’d be hurt worse than anybody else.
Very true.
But the right idea, even if it’s slightly mislabeled, is still the right idea.
How exactly was this new “uncrushable” formulation achieved? How did they do it?
http://crackverbal.com/black-uggs/
And this is what I was supposed not to understand?
Which was exactly what I was saying : there will always be someone willing to buy, providing you lower the price enough : “* There will always be someone willing to buy junk bonds for pennies to the dollar”*
I didn’t propose any specific discount. I was saying the market wouldn’t be able to absorb so much debt without a massive discount. Which means a massive raise of interest rates.
So, let’s say the “discount” is 50% to simplify. The US wants to buy the 1.3 trillions(presumably China wouldn’t sell for dollars in this situation, but let’s say the US buy back the debt from people who bought it from China). Obviously, it can’t emit new bonds to buy the old bonds, it would makes no sense. So, how does the US pay the 650 billions?. By printing that much money and creating inflation? By selling its gold and currency reserves? By raising taxes? How? Not buying them, of course, means that the market price for a 1000 US bond is $ 500 or a 100% interest rate.
Really? You know that the main debt holder is unwilling to buy new debt, or even hold what it had. The market is flooded by more debt than people want at a “normal” (not devalued by 50%) price. The US can’t emit new debt unless it’s willing to pay a 100% interest rate (market price). It has to pay back debt coming at maturity (at face value) while unable to emit new debt (unless again it pays a 100% interest rate). And there’s the regular deficit to cover too. How is the credit worthiness of the USA not affected?
There are more debt around than the market wants, at least at a reasonnable price. That’s pretty much the definition of a lack of credit worthiness.
You might argue that the market could absorb the debt dumped by China, with only a limited raise of interest rates (say, 3%, which would already be very bad), as I wrote above, but not that US credit would be unaffected if the value of US debt fell by 50% after China dumped it.
There’s no doubt that China would lose. But what makes you think that the debt would be traded at a price similar to the previous one? Currently, the market is presumably in equilibrium, with a low interest rate. If you suddenly drop 1.3 trillion of US bonds on the market, it’s obvious the value of these bonds will drop, which is the same as saying the interest rate will rise. The only issue is guessing by how much. 1%? 5%? 25%? More?
If you’re producing widgets and the main widget buyer, which consume 10% of all widgets don’t buy them anymore and sells all the widgets in stock, it’s obvious that the value of widgets will drop. And all rational players in the market, as you say, will buy widgets at a lower price, knowing there’s a much lower demand for them and a lot of them floating around. That’s exactly the same situation.
And, again, that’s assuming that the actors stay rational and don’t panic (and have no rational reason to panic).
That’s a data point. But the Federal reserve buying debt is just the USA buying debt from the USA. I’m not sure how it would change anything. It’s functionally the equivalent of printing dollars, unless something escapes me.
It does matter whether or not there are people wanting more bonds. If China doesn’t want them anymore, who is going to buy them? Presumably people who don’t want them now at the current price but would be happy to get some at a discounted price. My question is : discounted by how much? 0.5% or 99%?
And there’s no reason to assume that they would revert to the previous price. The market is over-supplied, but why do you think it’s “temporary”, unless the US buy them back (either directly or by not emitting new bonds for a while and paying those at maturity)? And if the US does buy them, it means creating money, hence inflation. If it doesn’t, it means lower price for bonds hence a rise of interest rates. I can’t see how you can escape that.
Again, the market is presumably currently at an equilibrium. The over-supply won’t magically dissapear. Unless the market becomes more confident in the USA than it is currently (hence wants more bonds, like the one China doesn’t want). Which seems dubious if China is dumping US debt.