In fact, the Trump administration could bankrupt the world.
Few people talk about what it means to “reserve” a currency.
During the Clinton administration, his treasury secretary Timothy Geithner had the idea to stop issuing treasury bonds. The argument was that the treasury market was so liquid, and bonds turned over so automatically, that a short-term bill had the same duration as a long bond. So why pay the extra interest?
Of course, bankers do things for their own reasons, not America’s.
The US went into a recession, government revenues collapsed, and the US started to run gargantuan deficits. This flooded the market with treasury bills of very short duration.
Banks don’t lend money “out.” Banks create money. Reserves are held as insurance against bank runs and loan losses. To operate as reserves, these assets cannot have any risk. Therefore, banks can only use very short-term bills as reserve.
This flooding of the world with bills, caused by deficits, is the fodder that allowed foreign banks to expand their balance sheets almost infinitely, especially in China. It is what allowed China to finance its trade bonanza and expand its industries worldwide.
The news that the US is contemplating issuing 50 and 100 year bonds is an act of war. Since nearly all foreign bank dollar reserves are in treasury bills, and banks cannot hold bonds as reserves, foreign banks would have to fund reserves in their own currencies.
Not even the Chinese want Chinese Yuan. Indians don’t want rupees.
A 100-year treasury bond carries almost infinite risk. If interest rates on a 100-year bond went from (say) 3% to 6%, that would be a 50% capital loss to the holder, but is that holder is a bank, and this is bank reserve, the bank would become insolvent overnight.
The ripple effects would be hard to imagine!
As I said, banks do things for their own reasons, not yours. It’s hard to imagine why they announced their intention to issue longer duration securities versus simply issuing them and not doing it as a press release. Surely the nano-percent of the world that understands what this means would pick up the news by simply watching the treasury issuance schedule which is posted on their web site.
As I am a keen observer of conspiracy and as the press release was posted in bold letters on Bloomberg, this news is clearly a warning shot to Asian banks.
If I had to guess, I’d say it was in response to China’s actions in Hong Kong, something the Chinese with their influence over the US media and US based Chinese sponsored think tanks has been able to suppress.
We shall see.