Manipulations of China with US government debt threaten to bring down “economic pyramid”
US, WASHINGTON (ORDO NEWS) — Washington may go further and withdraw part of the funds that China holds in US government debt due to the spread of the coronavirus. This conclusion was reached by analysts at the South China Morning Post. At present, China holds $ 1.1 trillion in government securities, the so-called treasuries. And US President Donald Trump openly threatens that China will “pay” for the spread of the coronavirus epidemic.
The world has already seen a precedent when the US Treasury did not return other people’s investments in its bonds – so billions of Iran dollars were frozen, these funds have not been returned in full so far. In fact, the White House may default on securities of the US Treasury and not give China its money.
“Theoretically, the United States can even take away its money from China, hiding behind the American courts – in that order, Iranian bank accounts in the United States were frozen in due time,” Belyaev notes. But in the USA they well understand who they are unleashing an extremely dangerous game with outrageous risks: China is not Iran, the scales are completely different.
China is a global power with a powerful economy, and America is no longer the same as before, and is not able to unconditionally dictate its will to the whole world. And the application of the Iranian scenario to China does not guarantee the same scenario of complete impunity. China is able to respond not only politically, but also economically, and even by military action. So it’s unlikely that the United States will dare to encroach on the Chinese trillion placed in their economy. ”
Chinese “hit” on the dollar
Chinese analysts suggested that China could respond to US hostile actions through its same investment in US public debt. Namely, to withdraw the $ 1.1 trillion allocated in the treasury, which theoretically will collapse the dollar and become a powerful blow to the American economy. At the same time, China can choose the most inappropriate moment for Washington for such a maneuver. And the situation of the States is now not the most favorable.
To date, the US unemployment rate has reached a historic record and has exceeded the Great Depression of 1928-34. The economy due to the epidemic of coronavirus is practically stopped, experts predict a serious recession this year. Washington is now busy issuing new bonds to finance a number of programs adopted to combat coronavirus infection and its consequences, and their volume reaches $ 4 trillion.
“Purely theoretically, a sharp drop in US bonds can really create serious problems for the US economy, but there are natural barriers for such a scenario. The fact is that it will not be possible to simultaneously drop a huge package of US government debt bonds. The US Treasury will not redeem them – each paper has its own the repayment period of obligations, and some of them are multi-year, so at one point you can’t get money for them.
There is an option to find another buyer and sell all US bonds belonging to China to a third country. But we must remember that the PRC is the largest holder of American treasuries, Japan is the second statistically. So, no state in the world will agree to buy up the entire package of US securities at once – someone simply does not need it, and most world players simply do not have money for it, “the expert emphasizes.
US waits for “bifurcation point”
The other day, the US national debt exceeded another record high of $ 25 trillion. Since February, US borrowing began to grow at an unprecedented pace – in the next three months, the US Treasury plans to place bonds for another $ 3 trillion. That is, the size of borrowings for the third quarter is more than double the same indicator for the entire last year. Growth is associated with the country’s struggle with coronavirus.
The Federal Reserve System (FRS) and its head Jerome Powell have already announced their readiness to buy back as many government securities on the secondary market as are needed to overcome the consequences of the crisis. In the summer, the US Congress warned that by 2049 public debt could reach an “unprecedented level” – 144% of the country’s GDP. Then it was stated that we are talking about “significant risks” for the American economy.
“Now the US economy is going through the so-called bifurcation point – it is at the crossroads of two scenarios. And a lot depends on how the Americans cope with the domestic economy. After all, even a gradual drop in China’s investment in US public debt will be a serious shock for America. And now the US is trying to restore growth to give the economy the dynamics of development that existed over the past quarter century.
If this succeeds, America will withstand the new challenges and the growing public debt. As well as withstood for many years. This debt pyramid did not collapse for a very long time simply because it relied on a vibrant economy. But still she hangs in the balance. Because it is worth the whole system to fail, collapse is inevitable. And the same conclusion of Chinese investments may become this catalyst. And then it will be possible to apply the words collapse.
And troubles in the American economy will be so serious that they will affect the whole world. Trade and financial chains will collapse, commodity circulation in many sectors will stop. So economists simply cannot desire such a scenario,” concludes Mikhail Belyaev.
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