Taxing foreign Treasury holdings? -- OMG! WTH?

Investment Analysis Clubs Macro Economic Trends and Risks
1

Sometimes economists come up with ideas that are so screwy, so wrong-headed, that I can only say, “OMG!!! WTH???” One of those is so-called “Modern Monetary Theory.”

Here’s one that is even worse that could literally crash the world economy overnight.

https://www.wsj.com/opinion/an-even-dumber-idea-than-tariffs-treasurys-economy-policy-ab1834c3?mod=hp_opin_pos_2#cxrecs_s

An Even Dumber Idea Than Tariffs

If import taxes don’t rebalance the economy, will Trump try a partial default on Treasurys?

By Joseph C. Sternberg, The Wall Street Journal, Updated April 17, 2025

…
It’s starting to look as if the White House is manifesting the views on the global economy of a circle of unorthodox economists. As Mr. Trump implements—granted, haltingly—these economists’ ideas on tariffs, we should take seriously the risk that the administration will push ahead with some of their other ideas, this time on global financial markets…

The Trumpist idea is that historical factors have pushed America into the role of furnishing the world’s safe assets, particularly the dollar and the Treasury note. Global demand for these assets is enormous—the world economy would judder to a halt without them—and satisfying that demand forces the U.S. to run a trade deficit…

The third proposal counts as the single worst idea ever floated by anyone associated with either Trump administration about anything: a tax on foreign holdings of Treasury securities.

To discourage the foreign reserve accumulation that supposedly drives the U.S. trade deficit, the thinking goes, Washington should discourage foreigners from purchasing dollar-denominated assets, perhaps by imposing a tax on foreign governments’ holdings of Treasurys. Such a measure, which Mr. Miran dubbed a “user fee,” would withhold some portion of the interest payments Treasury remits to foreign governments that own American bonds....

Make no mistake, such a capital tax would be a default. That’s what one calls it when a debtor unilaterally reneges on all or part of a promised repayment.

The great folly of a capital tax on Treasurys is that it would undermine the desirability of those assets even as our fiscal deficit continues to rage more or less out of control. … [end quote]

OMG!!! WTH???

Treasury yields are already higher (prices are lower) than they were in 2022 which impacts mortgages, corporate borrowing and the entire world economy.

Foreign governments’ Treasury holdings in reserve funds are about 16% of the total float of U.S. government debt held outside the Federal Reserve. The government deficit is projected to grow rapidly. If foreign governments refuse to invest in Treasuries that will increase the burden on American investors. Interest rates will inevitably rise.

https://bipartisanpolicy.org/blog/visualizing-cbos-budget-and-economic-outlook-2025/

If this policy is implemented a financial crisis and bank failures are guaranteed.
Wendy

11 Likes
2

Just blabbing such blither
of minds with no quiver
makes investors shiver
and crashes much quicker.

5 Likes
3

If only. The nation is no longer a democracy with civil rights.

2 Likes
4

Part of the Mar a Lago accord ‚idea‘.

Supposedly, the ingenious thinking is to get the rest of the world onto the negotiating table, pressured by steep tariffs the administration has leveraged on its own consumers.

Once there, those other nations would then happily agree to swap their existing treasury holdings against those proposed 100 year zero coupon papers, with a „user fee“ on top, as a tiny consideration for the privilege of holding the debt of an exceptional nation.

Et voila, it’s a ‚deal’, and not really a default anymore!?

1 Like
5

…and might the back up plan be for insiders holding the right crypto (that some WILL BE “bad” crypto is a foregone certainty) will become very very wealthy after the dollar crashes.

2 Likes
6

Well, when I hold foreign stocks, tax is withheld from the dividends paid to me.

If I hold US Treasuries, the interest is taxable by the Federal government.

The income generated by Russian assets in western hands is currently not being paid to Russia.

I see a precedent for taxing interest paid to foreign holders.

Steve

2 Likes
8

In as droll a voice as you can think of, “Bingo”!

9

I will go a step further than NPR did this morning. These issues on human rights were dropped because we here in the US will no longer have human rights.

Investors are running for the exits.

https://www.npr.org/2025/04/18/nx-s1-5357511/state-department-human-rights-report-cuts

4 Likes
10

Dear Wendy,

Things are getting even more scrambled.

11

This is Miran and co’s little plan for Trump.

They also want to force the foreign bondholders into century bonds, and to restructure US debt. The tariffs are used to blackmail them and to force them to coordinate a weakening of the USD. While some in there still wants to keep the USD as the reserve currency.

The want to use financial and the geopolitical stick together. The US lost the deal they thought they would win, and now they want to change the rules of the game to their benefits …again.

They think it is going to work like a charm. Yes, wishful thinking, and the art of another deal will not make it work either.

3 Likes
12

The tariffs are about to create millions of unemployed workers and thousands of bankruptcies this year into next.

The tax cuts are an even worse nightmare for the bond market. This band-aid to reconfigure taxes on bonds does not even put a little pressure on the bleeding out.

Get ready for it. The ignorant guy will blame anyone but himself.

1 Like
13

Very scary. Very true.

When will the presiding party do something, anything, to preserve our republic?

Putin has been conspicuously silent of late. Things are going his way.

4 Likes
14

The republic is lost.

We have the mid terms but I fear violence in DC.

1 Like
15

@steve203 the intent of imposing a “user fee” on U.S. Treasury coupon interest is completely different than a tax even though the effect is similar.

“To discourage the foreign reserve accumulation that supposedly drives the U.S. trade deficit, the thinking goes, Washington should discourage foreigners from purchasing dollar-denominated assets, perhaps by imposing a tax on foreign governments’ holdings of Treasurys.”

Taxes are imposed to raise revenue and are part of a system. For example, all dividends may be taxed. All interest may be taxed. To single out a specific investment to tax in order to discourage investors is something new.

They’d better be careful what they wish for. They may get it.

Wendy

5 Likes
16

Dear Wendy,

The rest of the world holds our USD. Eventually all of those dollars are spent with us. That was always the plan. Selling them US treasuries is the same as paying them interest on those dollars. We do not want that. We never did. The dollars themselves were an interest free loan.

We need to produce and we need them to use those dollars which won’t disappear to buy our products. Yes that is in the future for now. We do not need them parking the dollars with us.

17

Anybody besides me studying dollar future options?

1 Like
18

Dear David,

The EUR is more interesting. I am not talking futures.

19

Oh, I am more than sufficiently invested in Euros (real estate and securities) and enjoying the view. In fact I leave for Mallorca tomorrow (maintenance on property there as well as husband doing some concerts).

But I have irreversible dollar assets that I would like to get some undergarments for….

1 Like
20

Dear David,

Long weekend. Some time to make this announcement.

The bond market yields will shoot up in early trading. Global quakes. More deflationary pressure. Layoffs and bankruptcies.