Comments abound on the significance of the S&P downgrade of US debt. Some think it will affect the stock market open on Monday. I don't, but if it does, I suggest it will last at most a day.
In "On the S&P ratings move" Bruce Krasting said essentially the same thing on the lasting effect, however he expects "interesting market action come Sunday night as this news is digested."
Moreover, if there is "interesting action" Sunday evening, it may not have anything to do with the rating cut at all. Rather, I suspect it will be in relation to the ECB confirming it will buy Italian debt.
What got my attention in Krasting's article was a fallacious, yet widely repeated set of statements "I don’t expect to see some big headline that says, 'China to sell'. That’s not going to happen. The critical issue is, 'Will they buy more?' I doubt they will."
The first sentence is true. However, the idea China will stop buying US debt is complete silliness.
Trade Deficit Math
The rationale for my statement is a simple mathematical identity. There can be no dispute of it. Yet, people dispute it all the time. I have a brilliant writeup from Michael Pettis on this very issue that I received a few days ago via email.
The timing is perfect. Michael Pettis writes ....
Foreign capital, go home!
Is the PBoC going to stop buying USG bonds? Once again we are hearing worried noises from various sectors about the possibility of a reduction in Chinese purchases of USG bonds.
The threat of a looming US default seems to be driving this renewed concern, although I am not sure that the PBoC really is worried about not getting its money back. After all if the US defaults, it will be mainly a technical default that will certainly be made good one way or the other. Since the PBoC doesn’t have to worry about mark-to-market losses, unlike mutual funds, I think for China this is largely an economic non-event (not that there isn’t good mileage in pointing to the sheer silliness of the US political process). Still, for domestic political reasons it needs to be seen huffing and puffing over American irresponsibility.
Xia Bin, an adviser to the central bank, told reporters earlier this month that China should speed up reserve diversification away from dollars to hedge against risks of the US currency’s possible long-term decline.
Let’s leave aside the fact that every six months we have heard the same thing for the past several years, and nothing has happened, shouldn’t we nonetheless be worried? Won’t reduced PBoC purchases be disruptive to the US economy and to the US Treasury markets?