Mayhem in the US Treasury Markets, No Problem, China to the Rescue!

When you're down and troubled and you need a helping hand and nothing, whoa, nothing is going right.

Close your eyes and think of me and soon I will be there to brighten up even your darkest nights. —James Taylor, You’ve got a friend

China’s government has played the role of “savior” to what could have been a US treasury market crash last May. 

As the US Treasury markets seized up, the Chinese government added $25.2 billion to its US treasury holdings which represents the highest hoard ever.

From China Daily USA:

China, the biggest creditor to the United States, increased its holdings of US Treasury bonds by 2 percent in May to $1.32 trillion, even as foreign demand for the bonds fell for a second consecutive month, according to the US Treasury.

China had increased its holdings of US bonds by 1.6 percent in April, which was revised higher after an initially 0.4 percent drop. Japan, the second-largest buyer, trimmed its holdings 0.2 percent to $1.11 trillion in May…

US residents increased their holdings of long-term foreign securities, with net purchases of $27.2 billion, while foreign investors decreased their holdings by $39.2 billion, said the Treasury report.

The sum total in May of all net foreign acquisitions of long-term securities, short-term US securities, and banking flows was a monthly net of $56.4 billion, said the Treasury Department. Net foreign private inflows were $46.6 billion, and net foreign official inflows were $10 billion.

TIC data shows that total foreign ownership of USTs reached a fresh record of $4097.9 billion in May, surpassing the February highs of $4097.4. 

China’s additional acquisition of $25.2 billion of USTs has been the swing factor. This implies that China’s actions played a crucial role in providing counterbalance to the resurfacing of the bond vigilantes. [The Philippines joined the "you've got a friend" movement adding $.2 billion last May]

This also demonstrates of the deepening dependency by the US government on her Chinese counterpart.

Austrian economist Gary North explains;

The U.S. government is running about a $650 billion deficit this fiscal year. The People’s Bank of China is doing its part to help out. It just bought another $25 billion of this deficit last month.

Why is it doing this? To hold up the value of the dollar.

Why is it holding up the value of the dollar? To make it less expensive for Americans to buy goods made in China.

But then protectionists in Congress scream bloody murder, because China is subsidizing exports to Americans. Then they vote for federal spending that runs a huge deficit. So, in order to hold down government interest rates, the Treasury Department must find buyers of this debt, other than the Federal Reserve System. The Chinese central bank is a large buyer.

So, every time Senator Chuck Schumer of New York insists that China must be stopped from rigging its currency, he is really saying that the Chinese central bank should stop buying IOUs issued by Congress. Then he votes for another spending program.

The Chinese central bank creates money out of nothing, just as the Federal Reserve does. Then it takes this newly counterfeited money and buys U.S. government debt, just as the Federal Reserve does. It bought $25 billion of this debt last month. The Federal Reserve bought $45 billion. So, when it comes to currency-rigging, which central bank is the greater culprit?

This is the race to the bottom. Which central bank will destroy its currency first? Or, if the central banks decide not to inflate any more, which central bank will cease counterfeiting money, thereby causing an economic depression?

The two economies, China’s and America’s, are addicted to the drug of fiat money. The first central bank to quit counterfeiting — the first one to “taper” — starts the international recession. Which will it be?  The first one to stop inflating permanently will turn the recession into a depression. Which will it be?

In May of 2012, the Chinese government has been given direct access to the US Treasury which basically bypasses the crony Wall Street. That reveals of the significance of the US-China relationship.

Such dependancy extrapolates to a Dr. Jekyll and Mr. Hyde relationship where on the financial front, the US and the Chinese government have been operating stealthily as staunchest allies, as against the geopolitical front, which media paints both parties as nemesis or adversaries.

The implication as I wrote a year ago:

Of course the inference from the above statement is that the Scarborough Shoal controversy has been mostly a false flag. What you see isn't really what has been. Politicians and media has taken the public for a ride at the circus.

I would add that not only has the media portrayed conflict between US-China been to promote the military industrial industrial complex, it serves as convenient pretext for the political class of these respective nations involved in territorial disputes, to expand control on their constituents via more financial repression, more taxes, more regulations and other forms of political control...all in the name of nationalism. 

At the end of the day, the world operates in a gamed system.