Active Shooter Capitalism: U.S. Goes Postal on it Biggest Creditor

WHILE YOUR ATTENTION WAS DIRECTED ELSEWHERE: The U.S. is fast choking off two of China's major oil suppliers, Iran and Venezuela, and last Thursday, a Treasury and Commerce Department order effectively closed the American market to Huawei, the biggest Chinese cell phone manufacturer. That follows an announcement on May 14 by the US Trade Representative of a 25% tariff on a $300 billion basket of Chinese-made goods. Not surprisingly, China has started to dump $1.2 trillion in U.S. Treasuries it purchased in 2009-2013 that refloated the Federal Reserve emergency fund following the Wall Street meltdown. It is unlikely that China will be buying new U.S. debt securities to replace the hundreds of billions in 10-year Treasury Bills it owns that are now maturing and coming due.

What's next?

The Fed now says that it will resume buying back Treasuries again, and will dump its portfolio of mortgage-backed securities to pay for it - but, where's the real money to reinflate a bankrupted U.S. banking system coming from this time?

During the third quarter of 2008, the American banking system and its credit markets had a near-death experience. While most of us remember the yellow mortgage foreclosure signs that followed, few Americans know that the crisis was set off by a run on U.S. Treasuries by panicked investment bankers.

In October, 2008, trading volume in the then four trillion dollar a day U.S. Treasuries Repo Market -- the primary short-term lending source for big New York investment banks -- dropped 60 percent from levels a month earlier. One academic journal later described the fear and pandamonium by bonds traders this way(1):

[The] Financial Crisis of 2007-2008 was a repo run in two directions. Lenders holding privately-produced collateral in the repo market, e.g., mortgage-backed securities, ran to get their money back while borrowers who had supplied Treasuries as collateral wanted their Treasury collateral back.

After several large investment banks went belly-up during the waning days of the Bush Administration, tens of billions of dollars in Repo trades failed, as other banks were either unwilling or unable to produce "zero risk" U.S. Treasury Bills promised as collateral. The NYT tells the story a few years ago this way:(3)

"Let’s recall. The collapse of investment banks Bear Stearns and Lehman Brothers in 2008 Before it failed, Bear Stearns depended on $50 billion in overnight repo loans that it used to finance the majority of its mortgage-linked securities. A week before it collapsed, Lehman had $200 billion in overnight repo loans. Rescuing Bear through the JPMorgan purchase involved an unprecedented Fed commitment to absorb up to $29 billion in losses. And the Lehman bankruptcy kicked off a $300 billion-single-week run on money market funds and widespread panic."

According to a report yesterday in Bloomberg: (2)

As soon as next year, analysts say the Fed will resume large-scale buying of debt securities -- this time just U.S. Treasuries -- in amounts that may ultimately exceed its crisis-era purchases. According to an estimate by Wells Fargo & Co., the central bank’s balance sheet will rise past its historic peak as it adds over $2 trillion to its Treasury debt holdings in the next decade.

What this Bloomberg article doesn't mention is that since January 2017, the Fed has already gone through half its reserve fund, which it politely refers to as "unwinding" its position in mortgage-backed securities. While the Repo Market was quiet and orderly for years, the bonds traders are going nuts again swapping assets, seeking "haircuts" (the margin between market value and the rate of return available in repo deals) while banks are again hunting the relative safety of Treasuries in the Repo market. It's happening again, only this time, China seems unlikely to bail out the Federal Reserve.

Few Americans seem to be aware that when the U.S. banking system flat-lined during the Third Quarter of 2009, the primary reason it recovered was an infusion of more than a trillion dollars into the Federal Reserve's rainy day fund. During the years of "recovery" that followed money was lent out at negative real interest rates to major American banks. The program was called Quantitative Easing, or "Q.E.", on the street. The source of that injection that literally saved the U.S. economy from collapse a decade ago was a $1.2 trillion purchase of U.S. debt by the Chinese central bank and large state-owned enterprises.

Now, much of that debt to China is coming due, much of it in the form of a colossal stack of 10-year denomination Treasury Bills that are presently coming to maturity. The primary purchaser was China. At the same time, we are placing a gun to the head of Venezuela and Iran, along with a global oil embargo, countries that supply 10 percent of China's crude oil needs. Russia, also the target of U.S. sanctions regime, provides another 16%.

What the Administration has done to prepare for the next financial crisis is essentially this: Financing costs on the mortgage on the house are now due, and the response of the homeowner is to drive downtown to threaten the lender with a loaded shotgun. On his way to the bank, he holds up the Citgo Gas Station on the corner. Welcome to the age of Active Shooter Capitalism.
____________________
(1) The Run on Repo and the Fed's Response - NBER (2017) www.nber.org/papers/w24866
(2) Bloomberg.com, "QE May be Over But the Fed's Debt Hoard is Set to Double", May 21, 2019, https://www.bloomberg.com/news/articles/2019-05-21/qe-may-be-over-but-th...
(3) NYT, "Time to Reduce Repo Run Risk", April 4, 2014, https://dealbook.nytimes.com/2014/04/04/time-to-reduce-repo-run-risk/

Share
up
27 users have voted.

Comments

The Liberal Moonbat's picture

What's spooky is that I've heard this one before:

It sounds a lot like why Saddam Hussein invaded Kuwait.

up
9 users have voted.

In the Land of the Blind, the one-eyed man is declared insane when he speaks of colors.

@The Liberal Moonbat (as does EXXON) and the rest of us pay the escalating price of conflict. Somewhere in the trillions. More this time.

up
20 users have voted.
gulfgal98's picture

@leveymg the military arm of the oligarchy. The people behind all these wars owe no real allegiance to this country or the people of it. They are parasitic globalists of the first magnitude. This is why making war is more important (more profitable) than solving domestic issues. With war, big money wins and the rest of us pay and lose.

Plus, the oligarchy gets big tax breaks or pays no taxes at all while benefiting from US foreign policy of regime change and world wide devastation.

up
16 users have voted.

"I don't want to run the empire, I want to bring it down!" ~Dr. Cornel West

"Those who make peaceful revolution impossible will make violent revolution inevitable." John F Kennedy

The Liberal Moonbat's picture

@gulfgal98 Blue Team hates Russia, Red Team hates Venezuela, Trump wants to go Leeroy Jenkins on China, Bolton (no doubt) wants to market his own line of Persian-skin lampshades...and yet we'd sooner bomb Israel than we would the after-school-cartoon-villain-worthy KSA...

oil-addict-aesolar.jpg

up
14 users have voted.

In the Land of the Blind, the one-eyed man is declared insane when he speaks of colors.

Not Henry Kissinger's picture

@The Liberal Moonbat

Trump wants to go Leeroy Jenkins on China

Perfect analogy.

up
2 users have voted.

Peace Sells

@The Liberal Moonbat isn't that part of the reason Japan attacked the US in WW2?

up
8 users have voted.
The Liberal Moonbat's picture

@Snode That's a part of World War II lore I'm not actually that strong on.

It would certainly help explain an infamously dumb decision.

up
7 users have voted.

In the Land of the Blind, the one-eyed man is declared insane when he speaks of colors.

@The Liberal Moonbat
"The USA is twice as big as Japan and has many more resources."
"Doesn't matter, one Japanese soldier is better than five round eye soldiers."

The really pitiful part, a gun nut friend of mine explained in technical detail how inferior Japanese infantry arms were to American weapons. Aircraft were initially superior but never advanced technologically like US (and German) aircraft did.

up
4 users have voted.
The Liberal Moonbat's picture

@The Voice In the Wilderness Haven't you heard? Morality works differently now because somebody redefined words and now we all have to talk and think that way because they say so! Now, the truth is that ONLY WHITE PEOPLE are even capable of being racist, and ONLY MALES are capable of being sexist! Religious bigotry? Oh, we only talk about that when our Jewish and Muslim Allies can hear us, say, have you heard about those pagan reconstructionists? They're all Stupid White Male Racists and Sexists, you know....

INFWWDI.jpg

up
5 users have voted.

In the Land of the Blind, the one-eyed man is declared insane when he speaks of colors.

detroitmechworks's picture

@The Liberal Moonbat by the person who is offended of course...

Biggest whiner with the highest score on world's most victimized bingo gets to decide the issue. Ties go to the court of public opinion, and usually are broken by number of followers... and bribes to the judges...

up
4 users have voted.

I do not pretend I know what I do not know.

@The Liberal Moonbat

https://www.whyguides.com/why-did-japan-attack-america.html

The American Embargo

The acts of aggression commenced in 1931 when they occupied Manchuria in China. They also took over Indochina and other lands. Part of the reason why Japan attacked America had to do with the embargo. Because Britain and her allies were fighting Hitler in Europe, they could not protect their colonies.

Together with the United States they chose to set an embargo. These included stopping all shipment of steel and oil. These dealt serious blows to the reeling economy. In 1941 the Japanese decided to take over the oil fields in the Dutch East Indies. The only problem was the US Naval fleet stationed in the Pacific. On December 7, 1941 Pearl Harbor was bombed.

up
3 users have voted.

@Snode The story:
Dean Acheson, then a no-name at the State Department, defied a direct order from FDR and cut off the supply of fuel to the Imperial Navy. Attacking Iran and Venezuela will have the same result - WW3. China will have no choice.
But the plan will "backfire". China in retaliation will refuse refinancing on its American debt, and the government will have to cancel Social Security and Medicare (but not the FICA tax) to pay the t-bills.
Hows that for a hellish scenario?

up
8 users have voted.

A PROUD Hillary hater since 1993

@doh1304
would be to stop exporting all electronics and manufactured goods to the USA. Our economy would collapse as we can no longer make these goods. China even supplies ROM's to the US military. And big a security hole is that?

up
3 users have voted.
travelerxxx's picture

@The Voice In the Wilderness

I suspect that our vaunted military wouldn't even have underwear if China decides to get tough. I seriously doubt we could build even one modern electronic circuit board, much less the components that populate one — therefor, no computers, phones, missile guidance systems, no GPS. Even aircraft parts are made in China. No new autos could be manufactured without the electronic components necessary and when existing ones broke, they would stay broke.

Every Walmart would be almost totally empty. You wanna see civil unrest overnight? Empty Walmarts would do it in a matter of days.

China has a lot of stroke that they haven't even hinted at yet.

up
5 users have voted.

@travelerxxx

up
1 user has voted.
travelerxxx's picture

@The Voice In the Wilderness

I would agree about the lynching. Except, it's too late. The time for that was over 30 years ago. This is one of the reasons I have sympathy for those who voted for Trump. A whole lot of folks finally figured out that they'd been screwed. Decades too late, but figure it out they finally did and Trump just happened to be there at the right time.

Trump can try to throw sanctions on countries to promote our oil producers, ban imports from cutting edge technology manufacturers, tariff the bejesus out of foreign steel producers, etc., but it's too little, too late. The horse is long since out of the barn.

In the late 1970's, I had a ringside seat to watch the destruction. I owned a big 18-wheeler and made a living hauling stuff. Much of the stuff I was hauling was machine tools and miscellaneous factory equipment from the upper Midwest to ports on the East and Gulf coasts. From there, it was heading to Asia. I moved whole factories. Soon, so many had been moved, that I could see there was no future in hauling much of anything.

I watched as the mighty American industrial bases were strip mined. The unions were out of business, the workers lost their pensions, the cities shriveled and died. The owners cashed in because they could. They had no allegiance to this nation, although they claimed they were the backbone - the heroes of capitalism. They were, in fact, traitors - selling out their nation to make a buck more than before. And, yes, the politicians greased the skids, but it was the big money that placed the politicians in position to allow the gutting of the nation. This they all did with shiney American flag pins stuck in their lapels.

up
4 users have voted.

@doh1304 Duh on my part. Didn't know about Dean Acheson. Kinda like the Supreme Court clerk that inserted language into a ruling saying corporations are people.

up
0 users have voted.

Then interest rates have to rise enough for traders to dump marginal/inflated stocks and buy bonds. The combo will probably cause at least a mini-crash and a mini-recession. Since there has been no recession for ten years and only short-lived stock panics, both will probably be of at least dot-com crash levels. With goofy Trump and the Turtle at the helm, maybe 1929 levels as those inept thugs mismanage the crisis like Hoover did.

But it may be a mini- I don't have a math model to back me up, just history which usually tells what but not how much.

Note to the Supreme Being (with folded hands): Please Please French Revolution size!

EDIT: Alternatively the FED could create enough cash to buy the bonds at low rate (probably holding them themselves) causing massive inflation which they would be powerless to fight without crashing the real economy. These Republican economic policies always end badly.

up
15 users have voted.

@The Voice In the Wilderness That's a primary driving force pushing the conflict and a reason to expect its costs and intensity will be far worse than 2008. Not a mini this time. Alas, Babylon.

up
11 users have voted.
The Liberal Moonbat's picture

@The Voice In the Wilderness "The Economy(TM)" is seeming more and more like something only the .01% have even a connection to, let alone a stake in.

up
6 users have voted.

In the Land of the Blind, the one-eyed man is declared insane when he speaks of colors.

@The Liberal Moonbat

up
8 users have voted.
The Liberal Moonbat's picture

@The Voice In the Wilderness ...it just doesn't seem to me like the supposed state of the economy has anything to do anymore with what one can realistically expect of future for-richer-or-for-poorer.

There's a high-stakes, high-yield economy for the 1%, and a "the dregs keep circulating somehow" economy for the 99%.

Inflation could be a problem - maybe even a BIG problem, I certainly know about the horror and indignity of wheelbarrows-for-bread. Still, I've just been perusing the exchange rates on Google, and one thing I noticed is that the value of a currency has surprisingly little to do with its nation's prosperity - Japan, for example, is a first-rate First-World country, even though the Yen is comparatively garbage. By contrast, the Libyan Dinar is nearly equal to the Canadian Dollar, but have you seen Libya lately??? Meanwhile, somewhere far out in Dimension Z, Bitcoin fucking blows the doors and windows and bedrock off of every state-issued currency out there, but can you even buy a candy bar with it???

up
8 users have voted.

In the Land of the Blind, the one-eyed man is declared insane when he speaks of colors.

ggersh's picture

and the banks didn't have enough capital to pay off
their bets on derivatives, think AIG and that's the
cause of 07-08, IOW's the house didn't have enough
cash for the amount of bets being placed, and one
other note none of the WS banks trusted any of the others
to pony up what they had.

Finally to to it off the FED injected close to $27Tril
to stabilize the fraudulent banks(banking system)

GDP is nothing but a fantasy number so the politicians
in DC and the scum on WS can tell the sheeple what a bang
up job their doing forrobbing the economy

https://mcalvanyweeklycommentary.com/debt-gdp-china-us-qe/

LAST 5 YEARS: GDP WOULD BE NEGATIVE IF U.S. DEBT HAD NOT INCREASED

up
14 users have voted.

trump will be amerika's last president

ameriKa's been crapified and yes that
has trickled down

@ggersh Thanks for your response. If you're interested, here's a couple related articles in Reuters. The PTB are getting nervous about how China's continued withdrawal from the US Treasuries markets could blow out the financial system again. The outcome is not entirely under the control of governmental action, as there is the wildcard of investor psychology and the temptation of a Bear Run on the bonds and F/X markets by hedge funds and other manipulators. An escalation of the trade war could result in a multitude of cascading collapses.

May 15, 2019 / 5:46 PM / 14 days ago

China sells most U.S. Treasuries in nearly two-and-a-half years

Richard Leong

https://www.reuters.com/article/us-usa-treasury-securities/china-sells-m...

May 28, 2019 / 1:16 AM / 3 days ago

Explainer: Will China dump U.S. bonds as a trade weapon? Not so fast

Richard Leong

https://www.reuters.com/article/us-usa-trade-china-bonds-explainer/expla...
http://fingfx.thomsonreuters.com/gfx/mkt/5/179/179/China%20Japan%20U.S.%...

An abrupt shift in the balance of supply and demand could drive down Treasury prices, and drive up their yields, which move in the opposition direction to prices. That would cause a spike in borrowing costs for the U.S. government.

Also, because Treasury yields are a benchmark for U.S. consumer and business credit, interest rates on everything from corporate bonds to homeowners’ mortgages would rise, likely slowing the economy.

Such a jarring move would also erode global investors’ confidence in the U.S. dollar as the world’s top reserve currency.

up
0 users have voted.
Cassiodorus's picture

there has not been a dollar panic, the sort of situation in which the whole world starts to dump dollar-denominated assets onto the global market, including the dollar bills themselves, in which case your bank account reserves will be worthless.

up
7 users have voted.

"The degree to which liberals are coming to inhabit an alternate reality, impenetrable by facts or reason, is actually frightening." -- Steve Maher

snoopydawg's picture

and it's looking like they might do that. Lots of things for the military are used with them and that could cripple the defense companies. RT had an article about this, but it's not there any more.

The one thing that needs to be discussed is that it'd sure would be nice if companies that offshored their factories would bring them back home. This way there would be no need for so many tariffs. This might be over simplified, but then I'm not an expert on trade.

up
8 users have voted.

America is a pathetic nation; a fascist state fueled by the greed, malice, and stupidity of her own people.
- strife delivery

snoopydawg's picture

@snoopydawg

The republicans are trying to reform this policy because they are afraid of what a democratic president could do with it..but the democrats?

Ironically, some Democrats are balking at National Emergencies Act reform, hinting that the law could be a useful tool for future Democratic presidents faced with an obstructionist Republican Congress. This approach is understandable but shortsighted, and ultimately dangerous for our democracy. Trump is aberrant in many respects, but he is not the first president to misuse power, nor will he be the last.

Many people wanted Obama to roll back some of the power that was available to him during his tenure because there was a chance that someone like Trump could be elected. He didn't. Trump has put many of things on steroids. The only thing that can stop an imperial presidency is the Supreme Court, but...

up
8 users have voted.

America is a pathetic nation; a fascist state fueled by the greed, malice, and stupidity of her own people.
- strife delivery

snoopydawg's picture

How many subpoenas did ole Eric Holder ignore whilst he was Obama's Attorney General? I'm pretty sure that he ignored the one for the fast and furious debacle and maybe one for the Benghazi investigation. Sally Yates also ignored hers, but it's slipped my mind for what investigation. This is not something that just started happening. Many people from the Bush administration ignored lots of subpoenas on various investigations. Rove, Cheney and many others decided not to show up. Like I said, the executive branch has been getting too big for its britches for some time.

up
11 users have voted.

America is a pathetic nation; a fascist state fueled by the greed, malice, and stupidity of her own people.
- strife delivery