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NEW -> Contingent Buyer Assistance Program
<p>Graphrix,</p>

<p><em>"Per CNBC if the U.S. places sanctions on China to devalue the yuan they threatened to sell off t-bonds to create a dollar crash. The housing bubbleheads have said this all along and now China has said it directly."</em></p>

<p>Can you (or anyone else) explain what the short- and long-term effects of this would have on our economy? I've been trying to figure it out on my own, but I fear I am too stupid to understand the fundamentals well enough to grasp the big picture.</p>

<p>Thanks</p>

<p> </p>
 
Nude - Let's see. If the CCB dumps $1.3 tril worth of treasurys on the open market, the price of the bonds are driven down, way down, way way way down. How far is not knowable or imaginable. Yields are inversely related to bond price, so effectively all deposit interest rates would be forced to increase interest rates to compete. Correspondingly, the cost to borrow would increase by the same amount.
<p>

End result, massive immediate deflation. Maybe, but the truth is that no one knows.
<p>

The one thing we do know is the only reason the CCB is threatening this is to stop Hillary and others from seriously contemplating protectionist policies. It is not in the CCBs best interest to dump, but my bet is that if push came to shove they would throw out just enough at a time to create some great discomfort in the US economy and major political pain for anybody stupid enough to pass protectionist policy.
<p>

Oh yeah, if anyone thinks the market could somehow absorb $1.3 tril of bonds or anything remotely close to that amount, today the Fed released $13 bil for auction and no one showed. $13 bil is one one hundreth of $1.3 tril. Our congress can no longer legislate to their desire. The Chinese own us and they make the rules.
 
awgee





If they own T-Notes are their maturity dates on those so they couldn't necessarily dump them all at one time, correct me if I am wrong.





Now if they own US Dollars they could dump those anytime on the open market....or so I have been told. I also saw a chart inwhich Japan owns more US Dollars than any other country in the world.





As for them dumping anything owned in US currency I see it as a very faint chance of them doing anything. Both governments understand that they need each other to keep the global economy growing. To many large corporations rely on oversea growth to keep meeting the street's expectation and to many chinese factories rely on the US Consumer to buy their small manufactured goods.
 
mino - Dumping is selling the Ts on the open market before maturity, and they can do that any time they want. But, you bring up an interesting point which is rarely talked about in the MSM or anywhere else. The majority of bonds that both the CCB and JCB hold are 3 month and 6 month maturity notes, so they don't have to sell them in order to divest. All they have to do is hold till maturity and collect instead of rolling them over. Scary, huh?
 
Awgee....yes it is very scary. I just wanted to make sure that we were both on the same page. They can dump the T-Notes but will pay a penalty which really won't do much to help out our situation.





I think a bigger threat to the US economy will be, if a Democrat wins the Presidency, will be the expiration of the Bush Tax Cuts.
 
mino2126,





The Bush Tax Cuts are already dead. Everything is set to expire in 2010, so the congress gets to repeal them by simple inaction. They are good at that. It really doesn't matter who wins the presidency because the Democrats will almost certainly control congress.





I don' t know if the Chinese could or would do much damage by dumping T-bills or currency on the open market. The <a href="http://en.wikipedia.org/wiki/Foreign_exchange_market">Forex </a>market is so large, I think it could absorb a one-time dump with limited impact. I remember George Soros joking about the British governments attempt to prop up the pound when he was short the currency. The parliament voted to put $20 Billion to propping up the pound, and George Soros said that should help them for about 30 minutes. He wasn't far off.
 
<p>What I want to know is who is currently buying our bonds? Normally the MSM like marketwatch like to cover the bond auction but I had to search for an article that stated the 3 year auction had an 18.9% indirect bid vs. a 32.3% in the last auction. The 10 year auction today had a 31.1% indirect bid vs. the 35% average and about the same as May (notice they use the average to tone down the drop). Aside from today's sell off who is buying our bonds? Could the flight to quality really have that much effect?</p>

<p>The amount of US assets China holds is $1.33 trillion and they hold about $407 billion t-notes and bonds. I do think there would be a good knee jerk reaction if they did start selling. I just hope that is a day where I can watch CNBC when they go to Rick Santelli in bond pits and the chaos makes a bond trader clothesline him off the ledge into the main pit. Sorry he annoys me. Just because everyone else around him is screaming and yelling doesn't mean that he has to.</p>

<p>By the way if you didn't see awgee's comment on NIR's hedgefund in the most important post ever thread you have to read it. Not only is it funny it is a great comment.</p>
 
<p>Thanks awgee. I was confused by the price-to-yield aspect.</p>

<p>In my search for answers on this subject, I found this:</p>

<p><em>The danger for the dollar is not that China might sell US Treasuries of which China is already too big a holder to sell without suffering substantial net loss in the market. The danger is that US sovereign debt rating is now dependent on the credit rating or soundness of Chinese sovereign debt. If the Chinese economy hits a stone wall, as it will when the US debt bubble bursts and Chinese export to the US falls drastically, Chinese sovereign debt will lose credit rating, causing yuan interest rates to rise, causing more hot money into China, causing the PBoC to buy more US Treasuries, forcing dollar interest rates to fall and more hot money to rush into China, turning the process into a financial tornado that will make the 1997 Asian Financial Crisis look like a harmless April shower. This happened to Japan, but with foreign trade constituting only 18% of GDP in 2003, Japan was able to contain the deflation domestically. Still the impact of protracted Japanese deflation on the global economy was substantial. With China where foreign trade hovers above 81% of GDP, with an economy already highly concentrated on the coastal regions and unbalanced with little breadth and depth, a financial crisis will transmit beyond its borders quickly. This is the real danger for dollar hegemony. </em>- Henry C.K. Liu</p>

<p>Aside from his political bent, <a href="http://henryckliu.com/page55.html">this was by far the most in-depth analysis</a> on the subject matter I've run across. He's the IrvineRenter of the Asian business blogosphere.</p>
 
<em>"The Bush Tax Cuts are already dead. Everything is set to expire in 2010, so the congress gets to repeal them by simple inaction. They are good at that. It really doesn't matter who wins the presidency because the Democrats will almost certainly control congress."





</em>Yes you are correct that any inaction the Tax Relief will expire.





<em>" I don' t know if the Chinese could or would do much damage by dumping T-bills or currency on the open market. The <a href="http://en.wikipedia.org/wiki/Foreign_exchange_market">Forex </a>market is so large, I think it could absorb a one-time dump with limited impact."





</em>I heard Secretary Paulson on CNBC yesterday say something about this to the extent that it would not have the much of an effect. Something like they only hold a few percentage points of T-Bills compared to what is held world wide or traded on a daily basis.
 
<p>August 9, 2007 - French bank <strong>BNP Paribas </strong>said Thursday that it is freezing three of its funds because the tightening U.S. credit market has made them impossible to value. European markets were all down 1-3% on the news.</p>

<p>Here's a deeper analysis (by Tony Crescenzi) of the European Central Bank's response to lend $130B.</p>

<p>>>>In Europe, the interbank rate jumped sharply overnight, trading at 5.86%, the highest since 2001. This prompted the European Central Bank to lend $130 billion to European banks, which were seeking liquidity they found difficult to obtain in a market frozen by <a href="http://www.thestreet.com/p/newsanalysis/banking/10373272.html">the BNP news</a>. </p>

<p>In the U.S., the interbank rate, the fed funds rate, has also moved higher, although not dramatically. It's now 5.50%, a quarter point above the <strong>Fed's</strong> target. Although not high, the funds rate has traded this high fewer than 10 times over the past year. </p>

<p>The $130 billion injection by the ECB is extraordinary. On Sept. 12, 2001, in response to the extraordinary circumstances, the total amount of deposits at the 12 Federal Reserve Banks, which captures the scale of the Fed's liquidity injections, was $102 billion, 5 times normal. </p>

<p>According to notes in my recently published book, the 1,200 page revision to <a href="http://bouncy.thestreet.com/exit/www.amazon.com/exec/obidos/ISBN=0071448454/thestreetcom09A/"><em>Stigum's Money Market</em></a>, the average daily size of the Fed's daily open market operations was $6.4 billion in 2005 and the size of its 14-day repos, which are announced most Thursdays, was $8.7 billion. Today the Fed conducted a $12 billion 14-day operation, responding to the jump in the fed funds rate. It can thus be said that liquidity squeeze in Europe is impacting the U.S. </p>

<p>As the ECB said, it will fill 100% of all requests for in order to assure orderly conditions in the money market. Hence, there will be plenty of liquidity to handle the problem no matter the scale because the ECB can print as much money as is necessary. </p>

<p>What stands out most from this situation is its proximity to the Federal Reserve's meeting on Tuesday. If the Fed had even the slightest inkling that a problem of this scale might occur, its statement would have had a full tilt toward neutral rather than the partial tilt it gave. Today's events show that either the Fed committed a large policy error on Tuesday, or that both the Fed and the ECB are themselves more in the dark on the problems that lie underneath the surface than are investors in the financial markets. </p>

<p>While the Fed and the ECB may not have the providence to see all problems that exist, it should at the very least have a greater sense about conditions in the markets it controls -- the money market and the credit markets more generally -- and of conditions in the banking system. </p>

<p>As an aside, with <a target="blank" href="http://www.bis.org/publ/bcbsca.htm">Basel II</a> set to be implemented at the end of the year, policymakers must ask whether the new capital standards will be enough to safeguard the world's banking system against situations such as this one, where asset values are more difficult than normal to fairly value. <<<</p>
 
<p>Well, that explains the $240 drop in the DJI at opening.</p>

<p>The front page of <a target="_blank" href="http://calculatedrisk.blogspot.com/">CalculatedRisk</a> has several news stories from central banks which are dumping liquidity into the market.</p>

<p>My next thought is...what set this off? Something caused them to hit the panic button, but no one is writing about it.</p>
 
<p>>>>My next thought is...what set this off? Something caused them to hit the panic button, but no one is writing about it.<<<</p>

<p>Huh? Where have you been the last 2 weeks?! All the problems stem from the housing market and credit crunch.</p>
 
>>>“The <a target="_blank" href="http://www.sanluisobispo.com/business/national/story/112623.html">housing</a> market slump has Toll Brothers’ chief executive perplexed.”

<p>“‘This downturn is very different. It is the first one in my 41 years in the business that’s occurred when you have an up stock market, low unemployment, decent job growth and a very decent economy,’ said Robert Toll.” <<<</p>

<p>With all due respect, how hard is it to understand that a $7 an hour strawberry picker buying a $700k home is bad bad bad. Even if the stock market is up, unemployment is low, and there is decent job & economic growth, it is still bad bad bad.</p>
 
<p>oc-</p>

<p>I know the conditions have been ripe for this, but I don't see who/what actually pulled the trigger. The last few weeks have been filled with bad news, but the trigger even for DJI drops has always been fairly apparent...except for today.</p>

<p>Which is why I asked the question. I still haven't found an answer as to what event started the overnight panic in Europe.</p>

<p> </p>
 
Nude.....Europe got spooked when BNP announced the freezing of 3 of it's hedge funds. At that time many thought that Europe would not be affected by all the junk paper that has been floating around the US. They were already feeling the effects of the credit crunch so this was the straw that broke the camels back.





As for LIBOR can anybody confirm that it jumped 150 basis points? If so I am going to say it for all those stuck in ARMs that are reseting against LIBOR OOOOOOUUUUUUUCCCCCCCCHHHHHHH!!!!!
 
<p class="textBodyBlack">The credit crunch is doing more to hit the consumer directly. Sure there are still credit cards out there that offer low rates, just like there are still banks that offer decent rates. But it is becoming more and more pervasive and affecting more and more persons everyday. The only people immune will be those that didn't sign their life away to the credit demons of yesteryear.</p>

<p class="textBodyBlack">-------------------------------------------------------------------------</p>

<p class="textBodyBlack">Aug. 9, 2007 - Kristin Schantz, a 26-year-old manager for a human-resources company in Kenosha, Wis., got some unpleasant news in the mail last week. In a form letter, Capital One told her the interest rate on her credit card was about to almost double—she’d been bumped up from a fixed 8.9 percent rate to a "variable rate that equals the prime rate plus 6.9 percent"—or about 15.8 percent. Schantz, who says she’s “never late with payments,” is irate. The letter blamed rising interest rates across the economy for the decision.</p>

<p class="textBodyBlack">Schantz isn’t the only American who has lately received Capital One’s letter. Blogs are teeming with postings from people complaining about sudden rate increases by the company. In a statement to NEWSWEEK, the McLean, Va.-based Capital One acknowledged that it had raised rates for “some” customers, citing “business and economic factors (a core one being rising interest rates)” and changes in the lending market.</p>

<p class="textBodyBlack">For now, consumers can dump Capital One and move their balances to other credit cards with better rates—as Schantz has done. But because Capital One is the largest independent issuer of credit cards, its move may signal that similar rate increases are on the way from other credit-card providers. “It could definitely be a harbinger of things to come,” says Aaron Smith, a senior economist at Moody’s Economy.com. “They may have assumed more risk than other companies—but I would be very surprised if it was an isolated move.”</p>
 
<p>[Countrywide asshattery from the WSJ]</p>

<p>Countrywide Hit by Credit Market Woes


By JAMES R. HAGERTY


August 9, 2007 7:16 p.m.





Countrywide Financial Corp. faces "unprecedented disruptions" in debt and mortgage-finance markets that could hurt earnings and the company's financial condition, the Calabasas, Calif., lender said in a regulatory filing.





The company, the largest U.S. home mortgage lender in terms of loan volume, said reduced demand from investors is prompting it to retain more of its loans rather than selling them. The company also has been shoring up its finances. "While we believe we have adequate funding liquidity," it said in a quarterly filing with the Securities and Exchange Commission, "the situation is rapidly evolving and the impact on the company is unknown."





Payments were at least 30 days late on about 20% of "nonprime" mortgages serviced by Countrywide as of June 30, up from 14% a year earlier. Nonprime includes loans to people with weak credit records and high debt in relation to their income, as well as to people who don't document their income or assets. On prime home equity loans, the delinquency rate was 3.7%, up from 1.5% a year before. For all loans, the rate was 5%, up from 3.9%.





In a sign of the growing difficulty in selling loans, Countrywide said that it transferred $1 billion of nonprime mortgages from its "held for sale" category to "held for investment" in the first half. Countrywide marked the value of those loans down to $800 million. It also decided to retain as investments, rather than sell, $700 million of prime home equity loans, marking them down to $600 million. Countrywide has said many of those home equity loans were second-lien mortgages used by people who put little or no money down in buying a house.</p>
 
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