That is unlikely to be the result. The US national debt is over $21T now. $1T is <5%. Dumping that much on the market at once would certainly affect interest rates, but not at a catastrophe-inducing level, and all of the normal tools used to control interest rates remain available.

By comparison, the US deficit this year is ~$0.8T, i.e. the US itself is dumping nearly that amount into the market. The Quantitative Easing program after the housing crisis was $3.5T over a few years.

It's also unlikely that they would dump the entire amount at once, because causing a sudden short-term rise in interest rates is not to their advantage (they would take a bath on bond prices). But if they divested something like $100B/year, the effect on the market would be minimized.

1) to avoid future potential sanctions

2) a trial-run to gauge how the market would react to a similar move by China.

At its peak Russia held less than $0.2T, Russia liquidated approx $50B per month for 3 months. If China dumped $75B per month for 6 months, there would be pain that would likely spread into corporate bonds.

https://money.cnn.com/2018/07/30/investing/russia-us-debt-tr...

https://www.bloomberg.com/view/articles/2018-10-16/russia-s-...

(edit: formatting)

The Kremlin may be trying to pull off a balancing act by mostly shifting its cache offshore, rather than selling outright.

Analysts at the Council of Foreign Relations this week found that holdings of American bonds in Belgium and the Cayman Islands increased by about $45 billion in the same period that Russia was reducing its U.S.-based hoard, meaning it may have been an attempt to protect against seizure.

https://www.bloomberg.com/news/articles/2018-08-15/russian-g...

I had assumed (without evidence) it was the US. A plunge protection team of sorts.

ZH suggest the buyer was China.

https://www.zerohedge.com/news/2015-05-18/revealing-identity...

Most wars are great for business actually, even world wars! Let's not forget that WW2 was mostly responsible for dragging the US out of the great depression.

PS: Bitcoin mining is another story, but it’s little different than building anything in China and selling abroad.

What exactly is it that you think is happening, if I may ask? Does a Chinese citizen, perhaps vacationing in the US, walk into BoA or WF and ask a wealth management advisor how to move money to their newly opened account there?

How much would interest rates rise if $1T gets sold into an already weakening market?

I don't pretend to know the answer, but I'm pretty sure it's greater than zero.

[1] https://www.cnbc.com/2018/10/11/trump-says-the-stock-market-...

Of coz for those of us who are in it for multiple decades.... 4% drop doesn't surprise us.

No one cares about investors who only got into the stock market after 2008. They don't have enough capital to really impact anything.

One of the dangers inherent in this strategy comes in the timing of the rate manipulations. Be too aggressive with raising rates and you may lose large amounts of economic momentum. Be too slow to raise rates and you may have nothing to lower in the event of a recession.

So if China sold off a ton of US debt and it negatively affected the world economy, the Fed would likely cut interest rates in an attempt to counter the downturn.

[0]: https://www.macrotrends.net/2015/fed-funds-rate-historical-c...

The Fed doesn't just dictate interest rates, because who would listen to them? Instead, interest rates are set by the market.

If the Fed wants higher interest rates, they sell bonds in the market. If they want lower interest rates, they buy bonds in the market.

So if China sold a ton of US debt, that would reduce bond prices and increase interest rates. If the Fed wanted lower interest rates, it would need to buy a lot of that additional supply that China dumped on the market.

Aye, mostly. It's important to remember that the Federal Govt. has the ability to manipulate the money supply by printing money and the ability to nearly indefinitely borrow whenever they get into trouble. Note that borrowing implies issuing bonds, which will lower interest rates.

So the Fed cannot simply dictate interest rates, but if it wants to manipulate the rates there is not a whole lot stopping them. In a recession scenario I imagine they would not have much trouble justifying more borrowing to the American public.

With regard to the effect a Chinese selloff would have on the market (both the US bond market and the wider global economy) I don't know enough to comment. However, I am fairly confident that if such a selloff resulted in a major economic downturn the Fed would try to lower rates to stimulate the economy.

You have it exactly backwards.

Issuing bonds means selling bonds. Selling bonds or anything else puts downward pressure on the price.

When price of a bond falls, its yield (interest rate) rises.

Whoops! You're exactly correct. Issuing more bonds increases the risk of the issuer not being able to repay the debt and thus the debtors will demand higher rates to offset this increased risk.

Although, unlike other bond issuers, the Fed has other tools in it's arsenal that would allow it to manipulate the yield curve.

So when you see interest rates rising, that means there is more selling pressure than buying pressure.

Just like anything else, it is harder to sell bonds and get the price you want when bond prices are falling (and interest rates rising).

It's easier to sell and get a good price when bond prices are rising (and interest rates are falling).

This is econ 101.

Forget about the share of outstanding debt. That's money under the bridge. Think about the year-over-year change in the share of deficit spending funded by foreign buyers. Considering how explosive deficit spending will be over the next decade because of the tax cuts, compounded by higher interest rates, we could be in for a very bumpy ride.

What once were irrelevant swings in interest rates, current account deficits, domestic savings rates, etc, could quickly come to dominate the trajectory of the economy.

Sure, the Federal Reserve could soak up the deficit. But that would be much more likely lead to inflation than in previous periods.[1] Higher inflation means foreign buyers pull out, which leads to greater inflation and less capacity to purchase the imported goods that we're completely dependent on. It also means less profit on the international market for the high-margin services and industrial products we specialize in. Europe is doing a much better job than the U.S. at controlling deficit spending, and the Euro could easily become the new reserve currency.

[1] And don't forget, the Federal Reserve's mandate is low inflation and low unemployment. Congress may need to step in to change their mandate to de-prioritize low inflation, which would send a very nasty message to investors. Decades of easy money because of our current account deficit (aka trade imbalance) and strong domestic savings (via Social Security) has left people with a twisted perception of the consequences of budget deficits and inflationary monetary policy.

Surely you cannot be serious here. Europe is one (insert name)-exit away from total implosion. The Euro project was doomed from the very beginning: you cannot have a joint monetary policy without a unified fiscal policy (which never materialized through European consent - after failure of conquest i.e WW2)

The Euro area had a 2017 deficit of 0.9% of GDP, as compared to the U.S.'s 3.5%. And this is during a boom in the U.S.

https://ec.europa.eu/eurostat/documents/2995521/8824490/2-23...

The Euro isn't a better vehicle than the USD today, but it could easily become one. Not because the Euro improves but because USD will become less stable and attractive and the only realistic alternative is the Euro. Or maybe we end up with a more diversified system. Either way USD loses.

Get back to me when Saudi Arabia starts selling oil exclusively in Euros, or better yet, once European union surpasses the US in the number of aircraft carrier strike groups. You don't seem to understand the concept of a "foreign reserve currency" if you think Euro has a chance against USD. There is more chance of physical gold replacing USD as an inter-nation trade/reserve rather than Euro!

The U.S. is the world's reserve currency because everybody trades with the U.S. and the U.S. has run a current account deficit consistently since 1950, and with most of the world. That means everybody is holding USD and thus you can sell something to anybody else without needing sufficient imports from that buyer to cover the transaction. (Countries can't just buy USD willy-nilly; they need to find someone willing to trade USD for their local currency, which requires exporting some good or service.)

But that can change. Indeed, politicians are hell bent on changing it. And the global economy is exploding, meaning the U.S. won't be able to remain the center of the global commercial universe even if it wanted to.

What matters for each scenario is (a) how much it costs, (b) who bears the cost, and (c) how long it takes.

If Chinese creditors, investors and citizens bear 100% of the cost in scenarios 1 and 3, but they only bear 30% of the cost in scenario 2, then scenario 2 is preferable isn't it?

But what if Chinese citizens don't have a vote, and the damage to well connected elites is lower under scenario 1? Maybe that winds up the preferred course even if total cost is greater.

Who knows without the ability to even roughly quantify the primary, secondary and tertiary effects?

Selling treasuries is a double edged sword. Driving up borrowing costs for the US also lowers bond prices, wiping out the Chinese government's portfolio value, right when they need the funds for a bailout. Dumping a lot of dollars on the market will drive the dollar down relative to the yuan, hurting Chinese exporters right when their economy needs it most. China has really twisted itself into a knot on this one.

Who would be hurt in this scenario? Who are the lenders that don't get paid back? Are they banks? Ordinary citizens saving for retirement?

When those people don't get paid back, what are the second-order consequences? Is there a cascade of defaults when they can't make good on their obligations?