Learning to Float

BEIJING – Despite shaky economic fundamentals, US government securities are usually regarded as a safe haven. Whenever a crisis erupts, the value of US Treasury bonds gets a boost. Indeed, US Treasuries were among the few assets that did not decline during the global financial crisis in 2008-2009.

But the safe-haven status of US government securities is an illusion. They are safe only in the sense that no one can stop the Federal Reserve from operating its printing presses at full speed.

The market value of Treasuries depends on a wide range of factors. Now it is essentially sustained by a Ponzi scheme, with the Fed’s policy of “quantitative easing” keeping the price of Treasuries artificially high. But, at end of the day, no currency can defy the laws of economic gravity. The market price of Treasuries eventually will fall to levels dictated by US economic fundamentals.

For decades, China has been investing its vast savings abroad, waiting for greater efficiency in domestic investment allocation before starting to dissave. China usually holds US Treasuries to maturity and re-invests the principal and proceeds. What matters is not variations in the book value of these reserves, but rather their real value in terms of purchasing power when China decides to cash in.