You Should Sell Treasuries (Andy Xie, Caijing Magazine, October 2, 2007)
In a closed economy, inflation is a zero-sum game in wealth redistribution. Investors in fixed income lose and borrowers win. As the US owes so much to foreigners, inflation, at least the unexpected part, adds value to the US economy. It does give the Fed incentives to tolerate more inflation. Why then it just lets it all out and inflates away all the foreign debts? The problem is that foreigners may see what’s coming and sell everything right away. It would trigger the US bond market to collapse, which would wreck havoc on the US economy. Hence, inflation benefits the US only if foreigners can be fooled before it happens. The Fed is still paying lip service to inflation for that purpose.
You probably know what I am getting at. If you hold US bonds, sell. The Fed wants to rob you to help the bankrupting US homeowners. My hunch is that the US inflation would rise to above 4% next year and higher afterwards. Foreigners own 40% of the US treasuries, mostly central banks. They should sell now to demonstrate they wouldn’t accept the broad daylight robbery by the Fed. The selling would cause the treasury yield to skyrocket, which would offset the stimulus from the rate cut by the Fed. The Fed may have to change policy to appease foreigners when it sees the rebellion.
If foreigners don’t act and lay there like lambs, they deserve to be slaughtered.
When the going gets weird, the weird turn pro. - Hunter S. Thompson
06 October 2007
Advice to foreigners: Sell your Treasury bonds
Andy Xie, writing in Caijing (a Chinese business publication that republishes some of its articles in English), states his case bluntly (you'll forgive, I hope, the mild awkwardness in translation):