FIRE-SALE OF US TREASURIES IS A WARNING OF ACUTE STRESS ACROSS THE WORLD

Fire-sale of US Treasuries is a warning of acute stress across the world

By Ambrose Evans-Pritchard Economics Last updated: March 14th, 2014

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Somebody is a selling a fistful of US Treasuries. It could be Russia, or China, Turkey, South Africa, or Indonesia, or all frantically selling bonds at the same time for different reasons.

We don’t yet know. All we know is that the US Federal Reserve’s custody holdings on behalf of foreign central banks plunged by $106bn in the week ending March 12, the biggest one-week drop on record.

Russia’s central bank is undoubtedly liquidating reserves at a breakneck pace to prevent a collapse of the rouble, as foreign companies scramble to get all their spare cash out of Russian accounts before the G7 guillotine comes down on the Putin clan next week. It is certainly trying to remove its assets beyond the jurisdiction of the US authorities – though that will not be easy. The SEC takes no prisoners. In the end, the world is more frightened of US regulators than it is of Putin's tanks or his polonium. Soft power can trump hard power.

One investor told me that clients in Russia are literally loading up cars with computers, machinery, and anything that will fit, and rushing them out of the country for fear that assets will nationalised. Whatever happens, nobody will forget this in a hurry.

Yet the latest financial ructions go beyond Russia, they reek of stress in the international system. “Countries are intervening all over the place to defend their currencies, (which means they are tightening). Their central banks built up huge war chests of reserves for a rainy day, and now it is raining,” said David Bloom, currency chief at HSBC.

Indeed it is. The international order is unravelling. Russia is of course smashing the post-Cold War order by seizing Ukraine, and blowing up the global architecture of nuclear non-proliferation. Let us not forget that Ukraine agreed to give up its nuclear weapons – the world’s third biggest arsenal at the time – in exchange for a guarantee by the great powers in 1994 that its territorial integrity would be upheld. Russia was one of the signatories.

China is laying claim to large parts of the East China and South China Seas, and has established an air identification control zone over the Japanese-controlled Senkaku islands.

China and Japan are one blow – or misjudgement – away from outright military conflict. The battle on the Pacific Rim is ultimately even more dangerous than the West’s clash with Russia over Ukraine.

Whether or not the wheels really are falling off the Chinese economy remains to be seen, but the discussion has crept into the market. You can smell the beginnings of fear.

“The global situation is extremely serious,” Lars Christensen from Danske Bank. “Russia is committing economic suicide, there is a massive corruption scandal in Turkey, and capital outflows from China threaten to have huge ramifications.”

“If the US dollar were to strengthen drastically at this point, we would go straight into a global recession.”

That is indeed the risk. Let us hope the Fed can pull its head out of its closed-economy macro model for once and take a look at the world before it tightens again next week. Tread very carefully Madame Chairman.