Romney has only himself to blame for what is shaping up to be yet another looming campaign screw up created by eagerly inserting his foot into his partisan mouth before thinking. A few days ago, a Chinese dissident under house arrest managed to sneak away and make it to the US embassy. Imagine the embarrassment and heads rolling over that in the People’s Republic: a blind guy essentially broke out of jail guarded by the Chinese gestapo. They wanted him back, real, real bad. So the Chinese creeps kidnapped his family, probably held the equivalent of a gun to their heads, and the man, Chen Guangcheng, left the embassy and turned himself in.
Romney sees this, and like everyone else, he knows the Chinese hold all the cards. It’s their country, it’s their citizens, they have Chen and his entire family in custody, and thanks to the Republican party the Chinese also have a huge lever over the US; they hold a vast amount of US debt in the form of highly liquid bonds. If they start dumping those bonds they could crash the market, destroying deficit financing and sending interest rates through the roof. They can threaten to do it, or really do it a little bit, or a little more or a little less and so on, back and forth, whenever they want to with great precision.
So, US vulnerable, government agency alone in a strange country with control freak dictators, human rights at stake, super delicate situation with lots of downside, it’s a conservative wet dream! Time to try some sabotage! Romney lurched into the task with a look of near ecstasy on his otherwise soulless face:
(ABC News) — ‘The reports are, if they are accurate, that our administration wittingly or unwittingly communicated to Chen an implicit threat to his family and also probably sped up or may have sped up the process of his decision to leave the embassy,” Romney said. “If these reports are true, this is a dark day for freedom, and it’s a day of shame for the Obama administration.”
This was a big discussion on Morning Joe today, with Romney toadie Dan Senor — the same Dan Senor who was too wrong to fail under Bush — taking shots at the WH while GOP Joe played concern troll.
But the US didn’t give up, under the direction of Secretary of State Hillary Clinton, who has pleasantly surprised me with her work ethic and efficacy ever since she was appointed, we went to work behind the scenes, negotiating with the Chinese despite being at a huge disadvantage. And guess what happened next?
(Times Colonist) — The United States said Friday that China had indicated it would let blind activist Chen Guangcheng and his family leave the country soon, raising hopes of a resolution to a damaging diplomatic crisis.
State Department spokeswoman Victoria Nuland said China would expedite travel documents for the rights campaigner, who escaped house arrest and fled to the U.S. embassy, where he spent six days before emerging Wednesday.
If that ends up happening we have yet another situation where Romney could have kept his mouth shut or talked about something else. He clearly had no idea what he would do — not that anyone would blame him for that given the circumstances — he certainly didn’t bother to say what he would have done. But no, he chose to prattle on from the Fox News peanut gallery like a bull in a China shop and now risks looking like an idiot, again. While the Obama administration seems to be coolly and quietly working out a near miraculous resolution on a delicate matter with an otherwise stubborn, unyielding nation. How the fuck is this election even close?
Things like this are cool, since it shows what the current administration can do.
The disappointing part is that they can get stuff done, but there is still alot more that they can do but refuse.
Here’s hoping for a better 2nd half of Democratic presence in the White House.
Romney couldn’t care less. He’s got a free trip all the way to the election and all the Republicans will vote for him no matter what he says.
By tomorrow Romney will no doubt be taking credit for The Red Menace letting Chen go.
Sadly, no matter what happens, Mitt will lose no points among his supporters for criticizing Obama’s handling of anything. Those who are awake enough to notice that Mitt is trying to swallow his own gluteus maximus via both feet won’t vote for him anyway, and a low-information voter* might only remember the criticism, not the outcome.
*Most accurate euphemism I’ve seen for a while
If they’re highly-liquid, how could selling them crash the market?
And there are plenty of other trade-deficit-financed regimes (*cough* oil states *cough* Japan *cough*) who hold T-bonds:
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
Liquid simply means there is an active after issue market, it means you can get out of it quick by putting in a market order to sell. They could tank our bond prices like any other huge institutional holder of a stock or a bond; dump an unusually huge number of shares of stock or an issue of bonds on the market and it creates an imbalance, the price starts dropping (I’m not even sure they’d have to do that, all they might have to do is stop buying as many on auction as they are now and it could have an effect).
In a normal market higher rates on a trip-a bond would attract capital, especially when rates are super low like now, an equilibrium would be reached. But the Chinese are not a typical income mutual fund, they don’t just hold a few hundred millions in bonds, or afew billion, they hold something like a trillion plus dollars in face value, more than any other nation (And we’re probably not as likely to get into anything resembling a tense cold war or shooting war with those other nations, because Japan or Saudi Arabia would lose in ten seconds and they know it. The Chinese are the one nation on earth without that disadvantage).
They hold so many bonds in inventory already that if they decided to sell even a decent fraction, price be damned, day after day, they could blow right through normal open order support and spook the entire market, causing other investors to pull open orders and creating a collapse. No one knows where that would end, but it would be bad.
Take a look at the data in the link. China “dumped” $137bln of treasuries (10% of its holdings) since last July and market didn’t even twitch.
What’s really going on:
http://www.chinadaily.com.cn/china/2012-03/03/content_14746454.htm
This stuff gets wicked complicated real fast, but here’s a basic version of how it works. Let’s say Bill Gates wanted to cash out a billion or two in stock, assuming he wants the best price he can get and assuming he doesn’t want to scare and anger investors over MSFT, he would go through a broker-dealer, a firm with many thousand of clients like the one I worked at for almost 20 years, who would in turn call some portion of their retail clients and arrange individual buys usually in the hundreds or thousands of shares. A agreed upon day would come when the price was set by where it closed and all the transactions would be marked at that price on that day. The deal was done ostenisbly in that one day, but it actually took weeks or months to set up.
Now, let’s say Bill is thinking about going to war with MSFT and wants to cause the stock to drop and create chaos. Instead of a carefully arranged deal like the one above he essentially calls up a broker-dealer and says “Sell 50 million MSFT at market” …. that kind of order would cause MSFT to drop like a stone before even a tenth of it was executed.
But he’s unlikely to do that for several reasons, 1) he wouldn’t get a good price for most of it, 2) it would piss off every shareholder, of course those who were short would be thrilled :)
On top of that it would probably spook the hell out of the stock market because everyone would figure Bill knows something they don’t, adding more panic, adding to the drop and that could spiral out of control, not just in MSFT, it would probably spread to other software stocks, then tech stocks in general, and then the entire equity market.
This is a very simplistic comparison, but it conveys the idea and its accurate as far as it goes. If the Chinese or any large holder want to reduce their holdings without disrupting the market, there are ways to do it, not just institutional sales like the example above, in the case of bonds one could simply not replacing maturing issues with new ones, that kind of stuff. But if a giant holder wants to create a panic, there is a way to do that, too.
If we want to get a tiny bit more sophisticated, a large holder could quietly load up on put options and short bond futures over a period of time, and then pull the plug, and those derivatives would increase in value as the underlaying issues falls in price thus mitigicating their losses.
Liek I say, this stuff gets wicked complicated fast! But the main point is simple enough to understand provided one has no idealogical blinders on preventing them from accepting it: The Chinese are a potentially hostile nation in a unique way, and they now have the capacity to create utter chaos in the financial markets western capitalist countries, especially the US, depend on.
One thing always puzzles me. Actually many things puzzle me but just the one thing here. Our debt to China is a small portion of our total debt. I’ve always felt it gives the U.S. leverage over China. Certainly China can cause economic chaos. Chaos that hurts them potentially more than it hurts us.
Why doesn’t the old canard, “If I owe the bank $50K it’s my problem. If I owe the bank $5,000K it’s the bank’s problem.”, apply here?
This is a good question and it’s produced some great discussion around the toobz. It’s just hard to see how it gives us more leverage over them than it gives them leverage over us. It certainly aligns their interests with ours to a degree, all things being equal and rational they wouldn’t want to hurt our economy so bad it affects their investment. But there’s ways for them to hedge that risk, futures and options for exmaple, that would ease their pain. So the key is if they don’t want to. What if, someday down the road, they decide they want or need to inflict some pain?
No one knows exactly what would happen to either country or the entire world if they purposely crashed the bond market as hard as they could. Anyone who tells you they do know is either lying or doesn’t know they don’t know. Just like no one knows exactly what would happen to either country or the whole world if the US nuked the shit out of China. But we all agree it would be bad, we all think it would hurt China more than us in terms of destruction. Most people agree if the Chinese crashed our bond market it would be bad, and most agree it would hurt us more than them.
Here’s the thing though and this cannot be stressed enough: they can use the bond nuke in moderation, and they can threaten to use it in moderation without creating an international nuclear stand off or glassing over a town. They don’t have to completely wreck our economy to make a point, they don’t have to push the button and cause Mutual Assured Destruction. They only have to knock bond prices down a little bit to inflict immediate but completely survivable pain. They can spanks us or they can whip us or they can beat the livin shit out of us.
We on the other hand cannot just nuke them “a little bit” or credibly threaten to nuke them “a little bit” without it causing an enormous chaotic mess. They hold the cards: they can reduce their holdings any time. We otoh cannot say “We’re not gonna sell you any more bonds” because there’s no way we can stop them from buying them. We cannot say “We’re not gonna pay on your bonds” because those bonds can be held in street name for one thing, no way to know who owns what, and even if we could distinguish who owns what, just implying that would fuck up our credit rating causing lower bond prices and therefore higher rates on the bonds we do issue and pay on.
Keep in mind, they want higher rates, just like someone buying a bank CD, they want the highest rate we can safely handle paying. Knocking down the price a bit and raising the yield is good for the bond buyer, it doesn’t hurt them in the least, far from it. It does hurt us.
So it’s hard for me to see how it gives us more leverage over them than vice versa.
You can look at this the other way, though.
China’s concentration in treasuries represents a huge risk from falling prices (see the yield spike during the debt ceiling fiasco). So it’s not simply true that they want higher rates. And, checking Wiki:
Dollar devaluation helps US exports, of course. And the US-China deficit is falling (but the US is running even bigger deficits with oil countries, as I mentioned before).
You have to look at it as a delicate balance. If China crashed the US, the yuan would appreciate, which would hurt exports, and … well, why would they do that? The political system may be evil, but the people in charge aren’t crazy.
Let’s say China invades Tiawan and we don’t like it: would you rather them have a lot of influence on the US debt market or not have any influence on the US debt market in that situation?
Let’s say I’m in debt up to my eyeballs, and you are sitting on a shit ton of money and offering me revolving credit at great terms. If I start bragging how I’ve got you over a barrel, I’m laughed out of the room.
On one level, I don’t care; I’m not American.
On a more fundamental level, of course, I care. Taiwan and China have had a frosty relationship ever since Chiang Kai-Shek retreated there with the rest of the Kuomintang. It would be helpful if they didn’t.
But it would also be helpful if you didn’t overplay the significance of Chinese treasury debt holdings, and would stop posting stuff like ‘just nuke them “a little bit” or credibly threaten to nuke them “a little bit”’, which is a bit scary for those of us in the rest of the world.
That’s not how the real world is, though. Every recent Treasury auction has been oversubscribed.
The world wants to lend you money. Take it, spend it, make it worth our while to do so.
(And read Krugman.)
You strike me as a bit silly CM :)
Explain?