$2 trillion dollar holding at risk:
A wave of dollar selling in Asia is an ominous sign for the greenback as the world’s export powerhouse starts to question a decades-long trend of investing its big trade surpluses in U.S. assets.
https://www.reuters.com/world/china/asian-crisis-reverse-currencies-soar-dollar-2025-05-06/
Cheap financing for US debtors at risk, too, whether for the Treasury, or J6P.
The ten year treasury yesterday closed at yields near where Trump folded a month ago.
but, But, BUT, Friedman said that would not happen. (that is MILTON Friedman) He insisted that a dollar holder would take a loss if he sold dollars, or US bonds, to anyone, other than the US, so the holder would always, always, eagerly use his dollars to buy more Treasuries. That was how the US could print and borrow to infinity to buy imported stuff.
Steve
You are conflating the trade deficit with the budget deficit. I’m quite certain he never suggested what you are saying.
Do I need to post that interview again? Friedman was insisting the willingness of foreigners to accept Dollars, and buy US bonds, was infinite. Others here, have seemed to argue, that it is necessary for the government to run huge deficits, so that foreigners will continue to be willing to accept Dollars, because there is an abundant supply of US government debt to buy with them.
Steve
Dear Divitas,
That is a bet on a tax cut. No one wants to hold the bag.
That is indeed what he says, although I don’t think ever suggested it was infinite. The logic goes like this: They sell us a bunch of stuff for dollars. Now they have a big pile of dollars. What do they do with that? One thing is to buy bonds.
To be clear, we do not need them to buy bonds. But it is an advantage for us that they do.
I’ve never heard anyone here say that.
Also covered in that interview. Friedman insisted they could do nothing else, but buy US bonds. If they tried to sell dollars, or US bonds, anywhere else, they could only sell at a discount. Therefore they must by US treasuries.
I have. Maybe you recall, in the early 80s, when the new regime in DC wanted to enact a big, debt funded, JC tax cut. Greenspan obligingly spun a balanced US budget as a problem, because, he explained, the global financial markets depend on a large supply of US Treasuries being available.
There is a good quote, out there somewhere, about how “authorities” are used to cow people who see things differently. Friedman was an “authority”. Greenspan was an “authority”.
Google’s AI thing has a lot to say about that:
A common tactic to stifle dissent is to invoke the authority of those in power or traditionally respected positions. This often involves using their words, actions, or presumed influence to discourage questioning or criticism. Here are a few ways this tactic is often employed:
Using authority figures to “validate” decisions or policies:
Leaders might cite the opinions of experts, religious leaders, or historical figures to justify their actions, even if those figures were not consulted or might not agree with the current course of action.
Exploiting the public’s respect for established institutions:
Governments or organizations might leverage the public’s trust in courts, universities, or other entities to quell dissent by claiming that their actions are legitimate and backed by those institutions.
Creating a climate of fear and intimidation:
By associating dissent with disrespect for authority, governments can discourage people from speaking out against them, even if they hold unpopular or controversial views.
Perpetuating the myth of “unwavering” authority:
By portraying those in power as always acting in the best interests of the public, dissent can be framed as a betrayal or a disruption of the established order, which is often seen as a positive and necessary aspect of society.
Using “experts” to justify decisions that are actually driven by other agendas:
Some governments may utilize the authority of “experts” to support their own policies, even if there is no real evidence or support for those policies.
ooohh, we have to accept was Friedman says. He’s an expert. He won a Nobel Prize.
Steve
I confess I didn’t see the interview, but I strongly suspect he didn’t say exactly that. The first part is true enough, if China or whoever else were to sell bonds on a large scale it would drive the price down. So it would be in their best financial interests not to do that because they would be devaluing their own investment. But they don’t have to buy US treasuries. They do so because they believe it is in their best financial interests.
However, I am quite certain Friedman never said that federal budget deficits and trade deficits are linked. Germany is an export powerhouse and it runs a federal budget deficit.
Don’t recall, but I thought Volker was in charge back then? Anyway, I don’t see from your comment how he is linking trade deficits and budget deficits.
Well, what else, after Nixon shut the gold window.
For the alternatives, often, National Security is in the way:
U.S. Forces China Out of Port of Long Beach Terminal Ownership
Wait…
Then again,
Texas House advances bill that would prohibit land sales to people and entities from certain countries
Let’s face it, TIG wants it both ways - reduce the trade deficit, but no treasury rout triggered by less dollars being available to foreigners that would buy them as a consequence if he succeeded.
TNX yield climbed to 4.5% today.
Unless they are also going to prohibit land leases, this seems rather futile.
And, one wonders how such sales will be regulated. Will the existing owner be forced into this due diligence?
You are, of course, correct. I mistyped, meant early 2000s, when the Federal budget had recovered it’s stability after years of “fiscal responsibility” massive deficits.
Google’s AI does a faster job of sifting 20 year old press reports than I, so here is it’s reply:
Yes, Alan Greenspan did express concerns about the implications of reduced supplies of U.S. Treasury securities, particularly in the context of large fiscal surpluses. He worried that the elimination of Treasury debt held outside the Social Security system could impact financial markets
The “Greenspan Put”:
Greenspan’s approach, often referred to as the “Greenspan Put,” involved the Federal Reserve using monetary policy tools, like lowering interest rates and purchasing Treasury bonds, to support financial markets. This strategy helped to stabilize markets during times of crisis, like the 1987 stock market crash, by providing liquidity and discouraging excessive risk-taking.
Concerns about reduced Treasury supply:
Greenspan expressed concerns that large budget surpluses, if they persisted, could lead to a reduction in the supply of U.S. Treasury securities available to investors. This could have implications for financial markets, as a reduced supply of Treasuries could lead to lower prices and higher yields, as demand might not keep pace with the reduced supply
[
Impact on financial markets:
A decrease in the supply of U.S. Treasury securities, which are considered low-risk and highly desirable investments, could impact the overall health and stability of financial markets. If investors have fewer attractive and safe options, they might seek alternative investments, potentially impacting the price of other assets
One more time. The relevant part starts at the 2 minute mark. The connection between trade deficits putting Dollars in the hands of foreigners, and the Federal deficit, providing treasuries to be bought with those Dollars is implicit, but obvious to me.
Friedman, and Greenspan, both remind me of “if you can’t dazzle them with brilliance, baffle them with BS”
Steve
I’m quite certain that is not the case. Earlier in the video, he is quite clearly talking about the balance of payments, although he doesn’t call it that. As he says, the balance of payments always approximately balances.
He keeps talking about accounting because the trade deficit is only one part of the accounting. It is misleading to only look at the trade deficit and ignore the other components. You have to look at all of it. That’s what BoP is. BoP is very old economic concept, by the way. It isn’t something Friedman came up with.
Because the BoP balances, Friedman then gives one example of how it balances. Namely, foreigners buying US debt. That’s one way. But that’s not a requirement, there are other ways too, and they happen either organically or by policy. For example, direct investment in the US (are we seeing that? yes), foreign purchases of stocks (are we seeing that? yes), foreign lending to domestic borrowers (are we seeing that? yes), and so on. In addition, the exporting nation will see its currency grow stronger and the importing nation will see its currency grow weaker, with the obvious effects on trade as well.
In context, Friedman was politically conservative, pro small-government, and anti-inflation. There is no possible scenario where would advocate printing money to infinity. And is definitely not what he is saying here.
Correct, in exchange for selling their stuff to us, trade counterparties gain a claim on the US, either a claim on the government, or a claim on US companies. As Friedman says, there is little else they can do with the flood of Dollars the US throws at them, so, of course, the payments mostly balance. But there are practical limits to what they can buy, other than Treasuries. Most of us here probably remember the resentment toward Japanese interests, in the 80s, when they were buying up real estate and US companies.
We are seeing the same resentment now, with some states outlawing property purchases by Chinese.
If trade counterparties buy Treasuries, they avoid laws like Florida’s, and general resentment. Treasuries are also more liquid than real estate. But, if the government does not run a massive deficit, there may be a “shortage” of Treasuries. As I said, there is a linkage between trade deficits, and government deficits.
Steve
If you want to be a world reserve currency you have to have a supply of your currency that is much more than what you need domestically. The usual way to do that is through large trade deficits, which sends your currency out in the world so that they can put it in their reserves, use it to buy oil and other goods, etc.
You can’t be a reserve currency if you have trade balances. So… does M@GA want to lose reserve currency status? Are they prepared for the fall-out that would entail?
I posted a table before, showing that, while the GBP was the reserve currency, 120 years ago, GB also ran trade surpluses.
Steve
From perplexity.ai:
You can technically be a reserve currency without running trade deficits, but in practice, it is extremely difficult and historically unprecedented. Here’s why:
The Triffin Dilemma
The Triffin dilemma explains that for a currency to serve as the world’s reserve, the issuing country must supply enough of its currency to meet global demand. The most straightforward way to do this is by running trade deficits: the country imports more than it exports, sending its currency abroad, which other countries then hold as reserves.
Theoretical Possibility
Some economists argue that it is not strictly necessary for a reserve currency country to run persistent trade deficits. The U.S. dollar, for example, could be supplied to the world through other channels, such as foreign aid, military spending overseas, or direct investment, rather than just through trade imbalances. However, these alternatives are not large or consistent enough to meet global demand at the scale required.
Practical Reality
• The U.S. and other reserve currency issuers have historically run trade deficits as a direct consequence of their currency’s international role. This deficit allows foreign central banks and investors to accumulate reserves in that currency.
• If a reserve currency country moved to a trade surplus, it would reduce the global supply of its currency, undermining its reserve status and potentially destabilizing the global financial system.
Expert Consensus
• The Brookings Institution notes that the dollar’s reserve-currency role does not absolutely require continuing U.S. trade deficits, but in practice, the interplay of global demand for the currency and macroeconomic factors makes deficits the norm.
• Investopedia and other sources emphasize that the benefits of reserve currency status are “paid for with a trade deficit,” and moving away from deficits risks losing that status.
With regards to the UK 120 years ago:
19th Century Surpluses: Britain’s status as the “workshop of the world” in the 19th century was accompanied by a large current account surplus. This surplus was not always due to a positive visible (goods) trade balance, as Britain often ran a trade deficit in goods. However, this was more than offset by a massive surplus in services (such as shipping and insurance) and, crucially, by income from Britain’s vast overseas investments. The result was a major overall current account surplus, which allowed Britain to export capital on a large scale
GB, as most countries at the time, was on the gold standard. They could not print like a banana republic.
As in Friedman’s case, my suspicion is that TPTB decide on the policy they want, then look for an “economist” to make authoritative sounding noises, to legitimize the previously decided policy.
Steve
ralph
Speaking of. Hearing that China is opening a large gold vault in Saudi Arabia, to gold-back the Yuan, for the purchase of oil.
