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Comment by jordanb | Hacker News Reader

This would be a dumb move. If Japan's treasury started selling a large amount of US debt, the Fed could buy it up and pay interest to itself.

Japan would then have a whole bunch of non-interest-bearing US dollars and the Fed would have a lot of interest-bearing US bonds.

Now it's true that Japan's treasury could then use those dollars to buy something else like stock in US companies but they could have done that all along anyway. They bought the debt for the coupon payments.

What's actually happening here is what it looks like: Japan's economy is starting to seize up due to the Iran war. Since they have to import all their oil they're suffering from a currency crisis (they can't export enough to balance payments on their oil bills). The US is stepping in to support them because 1) Japan's current government is allied politically with Trump and 2) Japan's an important geopolitical ally that is being hit very hard by the Iran war.

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> Japan would then have a whole bunch of non-interest-bearing US dollars

They would not be holding the dollars long enough for the interest to matter. Those would instantly be traded for JPY, weakening the dollar and strengthening the yen, because the goal is to influence the exchange rate.

But this is what the US Treasury is doing on Japan's behalf without requiring Japan to give up any bonds. If Japan wants a stronger Yen against the dollar why not make them spend their reserves to support it?

Because Japan would sell its treasures to buy dollar with which to buy Yen, pushing the yield on US treasures even higher, speeding up the debt spiral.

Similar as the credit-swap lines for the Gulf countries: They have enough treasures to sell to cover their cash flow problems (from the blocked Hormuz), but (see above).

No it would not.

* Japan needs dollars to buy yen.

* Japan sells US bonds to the US Fed in exchange for dollars

* Japan uses the dollars to buy up Yen adding Dollars to the market and reducing the number of Yen.

Versus:

* The US Treasury uses Dollars to buy Yen on the open market injecting the same number of dollars and removing the same number of Yen

* Now the US Treasury owns a bunch of Yen it didn't want.

* The US Treasury either has to leave them on the books or, like, maybe buy Japanese government debt so it can get rid of the Yen?

* In any case Japan gets its monetary outcome (price support for the yen) without having to give up reserves (US gov't debt it owns) to do so.

1. US actually bought Yen with Euros, not with dollars. The time will tell whether that will be a good trade for them.

2. What do you mean by 'No it would not'? I am not sure what are you trying to say. If Japan sells US bonds (instead of, as usual, buying), the aggregate demand for US bonds will go down, raising the yield. It seems that that is what the US is trying to prevent.

Either they spent euro reserves or bought euros with dollars so that's kinda irrelevant.

This thread kicked off with an incorrect belief that Japan had leverage over the US with some threat to spend reserves. That leverage doesn't really exist because it can not have any more effect on the American fiscal position than the one the Treasury just took.

In fact the Treasury is helping Japan maintain a stronger fiscal position by not forcing them to liquidate reserves to protect the yen.

Instead the Treasury is using it's own balance sheet to protect the yen which is bonkers from a monetary "america first" perspective and it only makes sense within the context of the Trump administration protecting the Takaichi government from a crisis caused by Trump's war in Iran.

We are going in circles.

Anybody with large enough holding of US treasuries has leverage over the US: Large selling of those treasures will raise the yield on them, which is the last thing the US in its current situation needs.

Of course, such selling will crash the treasuries, incurring huge losses to the seller. Still, hoping/pretending there is no leverage is closing your eyes to the reality.

Reciprocally, US has capability to screw over such large holders by inflating itself out of debt, leaving them holding worthless paper/bits.

That's why China has been carefully riding itself out of treasuries for years.

> Anybody with large enough holding of US treasuries has leverage over the US: Large selling of those treasures will raise the yield on them, which is the last thing the US in its current situation needs.

No Japan or China or anyone else who owns treasuries can not control the yield on the US Treasuries because that is controlled by the Fed. The Fed has near infinite power to intervene to make the treasury yields be what they want.

If a country had a lot of US reserves they could increase the supply of dollars on the international markets through a lot of selling. But this is essentially what the US treasury is doing by using dollars to buy yen (with an extra step through Euros to make it more politically palatable)

Your mistake is assuming that the dollar supply and the treasury yield isn't a slider that can be zipped back and forth by the Fed.

> No Japan or China or anyone else who owns treasuries can not control the yield on the US Treasuries because that is controlled by the Fed. The Fed has near infinite power to intervene to make the treasury yields be what they want.

No. The yield is determined by what the buyers demand. The Fed can distort the market by buying treasures themselves. But that is not near infinite power. It fuels inflation and reduces credibility -> investors demand higher yields anyway. It can use other tricks (like 'leaked' Besson's memo), but those also have their limits.

> The yield is determined by what the buyers demand

Your mistake is misunderstanding the power central banks have in managing these assets. The Fed can make the yield whatever it wants. The Fed potentially has reasons to let the yield be high but it's a choice.

> The Fed can distort the market by buying treasures themselves

What you call "distorting the market" the Fed would call something like "setting the parameters of the market".

Regardless if you're ideologically opposed to the Fed actively managing the market for treasuries. The fact is that they can, and they do.

> inflation and reduces credibility

So you admit that the Fed has this power but they just choose not to exercise it? In any case, the Treasury's actions "fuels inflation" every bit as much as any intervention the Fed might take in the bond market.

To me it seems that you are ideologically opposed to anybody having the leverage over Fed, and believe Fed has overpowered magic.

There is no point repeating what maxglute wrote above.

> So you admit that the Fed has this power but they just choose not to exercise it?

Fed has the ability to buy as much treasuries as it wants. However, the power of that ability is limited, especially in situation like we are now, with rising inflation, high debt and dubious US credibility.

By the way the final thing you appear to not be understanding is that the Treasury had to borrow money to buy those yen. What do you think gets issued when the US Treasury borrows money?

You still have your blinders on.

Where did I say that the treasure had to borrow money?

It creates money out of thin air. What I implied is that creating too much money raises inflation and reduces its credibility, i.e. it can't do it in an unlimited manner.

You never said the Treasury has to borrow this money. I'm saying the Treasury has to borrow this money.

The Treasury does not have the ability to "create money out of thin air." That is not how any of this works. The treasury, when it buys something, does so either by using tax receipts or by issuing bonds. The tax receipts are spent. The Treasury is issuing bonds.

The Fed could create money and use it to buy Treasury bonds on the open market, as part of its Open Market Activities to manage interest rates (which is exactly what it would do if the Japanese sold US treasuries)

Ironically, the law actually forbids the Fed from buying bonds directly from the treasury, so the treasury has to float the bonds and then have the Fed buy them off the open market if it chooses to do so. So again you can see how insane this move by the US Treasury is.

I apologize, I have indeed mixed up the Fed and the Treasury in my last post.

To respond to your previous post:

I (naively?) thought that the Treasury had some Euro reserves lying around (like other central banks have USD reserves) and used those, not issuing new USD debt.

I agree that issuing new USD debt just to avoid the need for Japan to sell its USD debt (treasuries) would not reduce the pressure on USD debt.

Most probably it was mostly psychological market manipulation ('leaked' notes).

Yield is determined by market demand, overwhelmingly by institutional (central banks) who were marginal buyers, i.e. when USD was geopolitically safe, countries/central banks would buy without question for liquidity which artificially lowered rates. Now US fucked around with USD geopolitics, institutional buyers crowding to gold/commodities leaving private buyers (hedge funds etc) to fill demand hole, and private buyers demand higher yields because they buy for returns not liquidity. This why US debt servicing exploding - FED selling to more discerning market buyers and less to unquestioning institutional buyers.

Where PRC comes in is they have large amount of USD reserves (and shadow USD from trade) used to parallel lend to governments (BRI etc) which replaces marginal FED USD demand with recycled PRC USD supply, which forces FEDS to find more market buyers, by increasing rates further to clear auctions. Every USD from PRC reserves that goes towards bilateral lending is one not bought from FED that has be be replaced by market buyer at higher yields. Net effect is PRC has functional influence over US treasury yield. Now fed has infinite power to move slider to compete on yield... but in practice that slider can only go the direction that makes US debt servicing more onerous. PRC leverage (JP limited geopolitically) = FED has little power to reverse debt trap but some power to go broke faster. Some power because at some point of $$$ brrrt printing buyers will realize US may not be able to honor commitments and price risk accordingly.

Hm, maybe this is your misunderstanding:

- the fiscal position (the amount of debt the US owes) does not change by Japan selling the US treasures to other (non US) party

- but the party that bought the treasures from Japan will not be buying them from US, hence diminishing the demand for them, therefore raising the yield

* Japan liquidating its reserves to protect the Yen and its effect on US treasury yield or anything else can easily be undone by the Fed, if so desired. With an impact on the Fed's balance sheet for sure, but at a cost to Japan of liquidating its reserves

* Instead the US Treasury intervened to protect the Yen, allowing Japan to maintain its reserves while there still ended up being balance sheet consequences for the US

> the Fed could buy it up and pay interest to itself.

With what money..?

You're asking where the Fed gets money?

I'm just making you realize that what you're describing is inflationary.

So is the US Treasury actions. The US Treasury is using dollars to buy yen on the open market to support the price of yen versus the dollar.

It's actually using Euros to do it instead of USD.

Which it had to buy using dollars..

They have the option of simply putting it on their books, but that is the very last option.

They would rather borrow it. Sometimes they borrow it from themselves at artificially low rates, which is still better than simply not treating it as a debt at all.

Their preferred option is to auction off bonds. Though just at the moment rates on those bonds are extremely high, because reasons.

You're confusing the federal reserve with the treasury.

Two completely different and orthogonal institutions.

Also, rates are not high, they are historically well below the 30 years average.

It's a big world. There are a lot of places to buy oil from. And the balance of payments is not that complicated with energy - like where do Middle East OPEC members reinvest their dollars? In world assets. Like Japanese companies.

IMO, the far more impactful geopolitical conflict is still the war in Ukraine, between two countries with allies that actually have deep ties to the rest of the world, with casualty counts exceeding a million people.

But nonetheless the problems there, in Japan, are the same that generations of Japanese have already identified as a big problem, predating the fall of Bretton Woods or whatever modern top down policies: the patriarchy, nepotism and xenophobia... Many similar problems to the West. You cannot bank or math your way out of a suffocating patriarchy, which is to say, the humanities people have always had a bigger impact on our day to day lives than the people crunching for Jane Street interviews.

They don't invest in Japanese companies because Japan is horrific for corporate governance. Huge cash holdings, cross investments, etc.

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