Why China And Japan Are Unloading US Treasuries

It is all over the news. Countries are dumping US Treasuries. This means they are getting away from the US Dollar (USD).

After all, aren't the BRICS about to bring out their own global reserve currency?

Actually, the answer is no.

People keep missing some fundamental aspect to these entire discussion. For that reason, we see many espousing what turns out to be completely misleading.

Of course, a little investigation tied to logic will reveal what is actually taking place. This is why the masses are wrong so often. Listening to total garbage only leads to a bad outcome.

So what is going on with the second and third largest economies? Why are those nations unloading Treasuries like there is no tomorrow?

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De-Dollared

It all starts with the understanding what is taking place. Many feel that these countries are de-dollarizing. This means they are moving away from the USD to other currencies. This is not what we are seeing.

What is actually occurring is these countries, along with many others, are being de-dollared. They are not moving to other currencies. Instead, they are finding themselves without access to USD.

Remember when we discussed the fact there is a dollar shortage around the world. Many do not believe it since they buy into the idea the Fed prints USD. It does not. Rather, the Fed creates reserves which have no applicability outside its depository member institutions. This is not legal tender, which is exactly what the USD is.

This situation is prevalent throughout the entire banking system. There is a massive dollar shortage coupled with the same in collateral. This is causing a contraction of balance sheets which is hurting the ability for entities to operate.

So what does this have to do with China and Japan?

The answer is simple: companies in those countries have a lot of debt denominated in USD. Remember Evergrande and how much it off-shore debt it has? They are not the only entity in this situation.

Where this becomes a problem is that, even for companies that are looking to make the payments, they need USD to do so. Therefore, the commercial banks need to have dollars on hand. The companies do business in either Yen or Yuan and have to convert it to USD. This is how the payments are made.

So if the country is de-dollared, i.e. cannot get enough USD, it has to take steps to ensure it can provide the necessary currency. Here is where selling of US Treasuries comes in.

Future Dollars

Treasuries are bought for many different reasons. At the present moment, a large amount of buying is done for collateral purposes. Since there is not enough USD, banks are picking up Treasuries, especially T-bills, to get the best rates on the lending market.

This is also, by the way, why Japanese and Chinese companies would take on debt in USD. If you want to best rate, with the least amount of collateral, do the deal in USD.

When a Treasury is purchased, the currency used is USD. Throughout the term, the payouts are USD. At redemption, the money returned is USD.

In essence, US Treasury bonds (and bills) are future dollars.

US Treasuries are the most liquid asset in the world (next to cash). The market is always there although particular bonds might be non-liquid at times (off-the-run). This is why T-Bills are so desirable: they are always on-the-run (liquid).

Here is a way for countries to feed their companies the necessary USD that is required. They can enter the bond market and turn the Treasuries into cash. Since there is a shortage of collateral, most anything outside the 20 year will have a fair amount of liquidity.

Thus, these nations are battling an issue of being de-dollared, not de-dollarizing. They really have no option since there is a shortage of USD around the world. With the Eurodollar system struggling, the necessary funds are not finding their way to where they are needed around the world.

Once again, do not believe the rhetoric that is on CNBC or Bloomberg. They are misleading people completely.


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21 comments
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Bang, I did it again... I just rehived your post!
Week 117 of my contest just started...you can now check the winners of the previous week!
!BEER
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Thanks for the info, i remember just a day before yesterday I saw my dad trading with the Euro/JPY BUT surprise he just quit and s decide to to stop everything, I don't know why but maybe he got some information

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Depends upon which side the trade he was taking. Two poorly performing currencies there.

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I guess he is on the buy JPY side of things, the trading chart and AI is not really my path of specialty so I keep getting things confused even though I should know better. I will be learning a bit more about these things since am the one pushing the trades for him.

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Maybe you are right or wrong. We live in a precarious world with a competition to change the world order.

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Consider most do not know the order we live under, I am not sure they can decide what is going on.

Since few realize what the banking system even does, I doubt they have a clue about how things are operating.

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Living in Europe, a few dollars would have been useful for me now to be able to switch them into Euros and be able to get by. This article on the de-dollarization of China and Japan is very interesting. You are a great HIVE user

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Thanks for the compliment. The situation is Europe started in 2014. That is when many nations there started to have to unload Treasuries to try and get USD.

That is why most of us knew the Eurozone was in trouble. The warning signs were there.

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Thanks for this comment, Europe's problems actually start in 2014 as you said, but I believe that the Russia-Ukraine war has made the situation much worse than people can perceive. In Italy, companies are starting to close due to high costs due to the rise in energy prices

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I am wondering what these countries will do once their treasuries run out. After all, a lot of the dollars are all stuck in the Fed due to the QE.

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I don't know there is a shortage in dollars, I'm learning with your post. How come the second and third largest economy don't enough dollar and can a treasury be purchased using another currency apart from USD?

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No when the US Treasury sells the bonds and notes, they want USD. It is how they pay their bills.

And the reason there arent enough dollars is the US banking system is not lending enough. That is how dollars are created.

As for the Eurodollar system, that is collateral which drives that market. The problem is the US is the only high quality collateral since MBS were shown to be crap and, since the GFC, many government blew up their bond market.

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Could this be the reason dollar is appreciating daily??

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Not anymore, it’s reversing a bit.
I predict we break 105 on index by Friday.

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Yeah a shortage. It is going to be the overall trend in the medium term since we are likely to see a lot of loans requiring refinancing. That means more Dollars required.

Also, uncertainty is what pushes people to the USD. It is the ultimate flight to safety.

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I’ll buy them don’t worry :)

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Summary...
bearish on the USD
bullish on crypto (and especially Bitcoin)

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