Krugman Notices the Chinese Selling of Treasury Debt

This one goes in the "Paul Krugman for Future Use" file.

He has noticed the recent selling of US Treasury securities by the Chinese:

Remember the dire threat posed by our financial dependence on China? A few years ago it was all over the media, generally stated not as a hypothesis but as a fact. Obviously, terrible things would happen if China stopped buying our debt, or worse yet, started to sell off its holdings. Interest rates would soar and the U.S economy would plunge, right? Indeed, that great monetary expert Admiral Mullen was widely quoted as declaring that debt was our biggest security threat. Anyone who suggested that we didn’t actually need to worry about a China selloff was considered weird and irresponsible.

Well, don’t tell anyone, but the much-feared event is happening now. As China tries to prop up the yuan in the face of capital flight, it’s selling lots of U.S. debt; so are other emerging markets. And the effect on U.S. interest rates so far has been … nothing.

Who could have predicted such a thing? Well, me. 

In other words, Krugman once again reveals that he doesn't understand markets. Just because Chinese selling of Treasury securities hasn't put major downward pressure on bonds yet, doesn't mean it won't happen in the future. As I pointed out today in the EPJ Daily Alert, the Chinese might be able to get away with some selling without rattling the markets, but that doesn't mean a saturation point won't be eventually hit, and at that point anything can happen.

GLS Shackle, who judging by the way he wrote did understand markets, once explained:

It will be a kaleidic society, interspersing its moments or intervals of order assurance and beauty with sudden disintegration and a cascade into a new pattern. 

This is especially true in a world where you have governments acting at the macro level. Things can appear orderly for a period, when the government is establishing a new trend, but that doesn't mean, at all, that a sudden disintegration and a cascade into a new pattern won't eventually occur.

China sold  $43.3 billion in currency reserves last month, undoubtedly mostly US Treasury securities. But that doesn't mean China is anywhere near the end of its selling. China remains the biggest foreign owner of Treasury securities. It owned $1.241 trillion Treasury debt at the end of July, the latest period for which data is available.

Is there a saturation point? Is there a point where the kaleidoscope turns, to make Krugman's current confidence that China's debt selling won't eventually result in strong upward pressure on US interest rates, look silly? Very likely.

 -RW