plobrutto's  Instablog

 "If something cannot go on forever it will stop." -- Herb Stein

"And then what?" -- Warren Buffett of Berkshire Hathaway (BRK.A,BRK.B)

Over the years, I've been following the various ongoing discussions concerning China's (FXI,PGJ,CYB) accumulation of US Treasuries, and I can't help but think about the above two quotes. What would happen to the US dollar if the Chinese government stopped buying US Treasury securities?

Now I'm no economist, but here's how I see it...

Premise #1: At any given moment, there's a certain finite amount of US dollars around the world held by a variety of entities. 

Premise #2: These entities exchange these US dollars for investment assets and/or consumption assets with other entities. 

Premise #3: Once these US dollars are transferred from one entitiy to another, then the recipient entity must in turn decide what to do with those US dollars.

Conclusion: The relative amount of these US dollars compared to investment or consumption assets determines its relative value - not who holds them.

So in the grand scheme of things the relative value of the US dollar shouldn't really depend on what the Chinese government does. Now, it may affect it's relative value to the Chinese Yuan, but that's about it. 

And this explains why the Chinese government is concerned with the value of the assets that it is buying with their US dollars - namely US Treasuries - and not the value of the US dollars themselves.

Disclosure: Long PGJ