Explain please...

aroominyork

Monevator's newsletter today: 

"Trump’s supporters don’t care less that China ultimately buying a lot less US stuff would mean it would have far less need to hold shedloads of US treasuries.

"Nor that unwinding China’s US debt stockpile would see US rates soar, crippling US households."

I'd like to understand how these issues are connected. Would someone please explain?

EthicsGradient

aroominyork said:

Monevator's newsletter today: 

"Trump’s supporters don’t care less that China ultimately buying a lot less US stuff would mean it would have far less need to hold shedloads of US treasuries.

"Nor that unwinding China’s US debt stockpile would see US rates soar, crippling US households."

I'd like to understand how these issues are connected. Would someone please explain?

Wouldn't it be easier to ask the question there in comments? That way, the author would see it.

masonic

It wasn't clear to me either. A reduction in US imports in isolation would increase the trade imbalance, leading to a greater accumulation of USD and (ordinarily) a desire to prevent the Yuan from appreciating vs the dollar by using Treasuries to absorb the foreign exchange reserves. So to me, the first statement is a bit of a non-sequitur. But it is not only imports that will reduce, but also exports to the US, and those haven't been mentioned. Perhaps the point was that the need for currency management to keep exports competitive would lessen.

The unwinding of China's US debt stockpile is a separate thing, and has been going on since before this trade war. China has reduced its reserves by about a quarter over the past ~3 years. It would make sense for it to continue doing this to diversify and reduce its reliance on US debt, especially given the increasing tensions.

Albermarle

As we are in explaining mode, can someone explain why the Pound has dropped so much against the Euro in the last week or so.

Both the U.K. and Eu are affected similarly by the antics over the Atlantic.

The only explanation I can find is that the Pound often depreciates in times of global economic stress.

jim1999

aroominyork said:

Monevator's newsletter today: 

"Trump’s supporters don’t care less that China ultimately buying a lot less US stuff would mean it would have far less need to hold shedloads of US treasuries.

"Nor that unwinding China’s US debt stockpile would see US rates soar, crippling US households."

I'd like to understand how these issues are connected. Would someone please explain?

I think the connection is that if China doesn't buy US stuff, it doesn't need US dollars in the same volume. If it doesn't need US dollars, it doesn't need US treasuries.

If it doesn't need US treasuries, it could sell them.  Doing so would reduce the price of US treasuries on the secondary markets, so buyers could pick them up more cheaply.

In that scenario, when the US wants to issue new treasuries (which it always does), it needs to offer them at a higher rate of interest for people not to say "no thanks, I'll just get a cheaper one on the secondary market".

So the rates increase and the US owes more on its future debt.

BuildTheWall

Albermarle said:

As we are in explaining mode, can someone explain why the Pound has dropped so much against the Euro in the last week or so.

Both the U.K. and Eu are affected similarly by the antics over the Atlantic.

The only explanation I can find is that the Pound often depreciates in times of global economic stress.

EUR and CHF are ‘safe haven’ currencies due to the strength of trade surpluses and long term stability of German and Swiss economies. USD was also one, but the tariff tantrum has shot the confidence in it. GBP has a long history of the country shooting itself in the foot, thanks to both trade deficits and the political decisions like Brexit and Truss mini budget. 

Whenever there is panic in markets, money flows towards safe havens and away from riskier ones. 

Albermarle

BuildTheWall said:

Albermarle said:

As we are in explaining mode, can someone explain why the Pound has dropped so much against the Euro in the last week or so.

Both the U.K. and Eu are affected similarly by the antics over the Atlantic.

The only explanation I can find is that the Pound often depreciates in times of global economic stress.

EUR and CHF are ‘safe haven’ currencies due to the strength of trade surpluses and long term stability of German and Swiss economies. USD was also one, but the tariff tantrum has shot the confidence in it. GBP has a long history of the country shooting itself in the foot, thanks to both trade deficits and the political decisions like Brexit and Truss mini budget. 

Whenever there is panic in markets, money flows towards safe havens and away from riskier ones. 

Thanks, so as I thought it is more down to general sentiment/ confidence than something particularly specific.
Made my next holiday more expensive though 🫤

Hoenir

Albermarle said:

As we are in explaining mode, can someone explain why the Pound has dropped so much against the Euro in the last week or so.

I'd focus on the $ in the short term. The sell America narrative is causing a flight of capital. The Euro by virtue of the countries that use it offers far more opportunties. Not a long enough period of time has elapsed to make judgements. The Trump administration was certainly rattled by the US bond markets recently. Not what they expected. Resulting in a backtracking in tariff imposition.  This is a story that's going to run and run for many months. As the unwinding of positions and detachment from the US $ continues to grow traction. 

jimjames

Albermarle said:

As we are in explaining mode, can someone explain why the Pound has dropped so much against the Euro in the last week or so.

My understanding is that the market is now pricing in at least 3 drops in UK rates this year when previously it was only 2, I'm guessing the Eurozone isn't expected to drop rates as much

artyboy

Albermarle said:

As we are in explaining mode, can someone explain why the Pound has dropped so much against the Euro in the last week or so.

Both the U.K. and Eu are affected similarly by the antics over the Atlantic.

The only explanation I can find is that the Pound often depreciates in times of global economic stress.

It's a right pain in the a@se, that's what it is. More specifically it's costing me several hundred quid more to pay the deposit on a ski holiday versus if I'd booked it a couple of weeks back.

Please form an orderly queue with your messages of sympathy...