China sells US treasuries in order to appreciate Yuan relative to USD.
Supply of US treasuries on the market increases.
Demand for US treasuries decreases due to concerns over a large enough Chinese sell-off. Demand for US treasuries increases due to uncertainty over the stock market. Net effect on demand is uncertain.
Assuming worst-case scenario (for the US) in which supply of US treasuries increases and demand decreases: Yields on US treasuries increase as investors with less demand must be compensated for taking on a riskier and more plentiful asset.
Yields rise, and the US government must now service a higher level of debt, pushing the deficit higher. US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line.
Bottom line: This probably won't have an effect on US economy as investors need somewhere to park their money that is not the stock market. Also, the scale at which China is selling off treasuries is assumed to be pretty small ($40bn/mo compared to $3.65tn total holdings).
Now if China initiated a mass sell-off of all of its US treasuries, there would be huge ramifications. But in its current form, this seems to just be one more way for China to slowly unravel its position in US treasuries while playing with the value of the RMB.
> Now if China initiated a mass sell-off of all of its US treasuries, there would be huge ramifications. But in its current form, this seems to just be one more way for China to slowly unravel its position in US treasuries while playing with the value of the RMB.
Offloading foreign currency holdings in a mass sell-off is not something China would WANT to do -- it would end up destabilizing the Chinese economy more than the US economy. Not even as an economic warfare tactic: the global economy is dependent on cheap US money, and messing with that would set off a global recession that would hit an emerging superpower like China especially hard.
I think you're right and China is just looking to rebalance its currency by drawing the dollar down a bit. That's not the worst idea in the world (either for China or for the US) and they're doing it right around the time the Fed was planning to raise rates anyway. I think the market is already spooked enough by the troubles in China that it would probably welcome a rate increase (for the reasons you listed above).
> Offloading foreign currency holdings in a mass sell-off is not something China would WANT to do
I'm sure China is not only guided by purely economic considerations here. They might already consider the possibility that China/Russia will soon be in a war with the US.
It might make sense here to take an economic hit to bankrupt the US (or at least threaten it) to prevent an active military confrontation.
> Not even as an economic warfare tactic: the global economy is dependent on cheap US money, and messing with that would set off a global recession that would hit an emerging superpower like China especially hard.
People will suffer when countries engage in economic warfare and even more so if they engage in war. This has never held off a country escalating from economic tensions up to military actions.
If China deems this is necessary because it is the best choice they have, they will certainly do it no matter what.
It's not payback; this doesn't hurt the US in the slightest. If anything, it devalues the dollar a little bit, which isn't really a terrible thing (the dollar is pretty highly valued right now which hurts US exports).
How does this make sense? I always want the currency I have to increase in value, not decrease. Does anyone actually like it when their savings lose value and they can no longer afford things they used to? Sure it helps exporters export more stuff, but they're getting paid with more worthless money so what's the point?
It makes sense when you have debt instead of net savings. And it makes sense when your consumables are local, but you export internationally, so now your foreign customers can afford to buy more.
IMHO if the government is going to put its finger on one side of the scale or the other, it makes more sense to punish people who keep their money in their mattress and don't invest it.
When you see your bank proudly advertising 1.9% rates on 60-month CDs, you know it's time to take some risks with your money... the kind of risk-taking that grows the economy.
I've asked this question few times. If you devaluate by 10%, your export must go up by 10% to break even or otherwise it would be foolish move. Will exports always go up in proportion? Will we all be start buying more Chinese goods because they are 2% more cheaper? I think it's all speculation. Economists are basically trying out all the knobs at their disposal to see if it works and if it doesn't then they will rollback the change in a month or two. The general wisdom that devaluation helps exports makes sense only when market has room to grow by falling prices.
Welcome to the fiat monetary system. The current monetary policy is to have your currency lose value every year. If you don't want your savings to lose value, save in something else, e.g. gold, stocks, real estate.
Right.... you keep telling yourself that. Overall, yes, keep money in investments. But don't speculate on Gold, its one of the worst performers of all time.
Gold prices, like many asset prices, are manipulated openly and secretly by major organizations like central banks.
When people buy gold, it's not because they think the manipulated price is worthwhile, it's because they believe it is intrinsically mispriced and are betting that there will be a price correction at some point.
I mean, can you look at this stock market which has miraculously doubled since 2008, all while the federal reserve has pumped trillions into asset purchasing, and believe our equity and asset markets aren't being heavily influenced by state level actors?
Holding anything more than 5 oz of gold was illegal between FDR and Nixon.
Nah man, Gold ain't worth it. Historically it has been seized by the State, and in "modern times" (after Nixon rescinded EO 6102) it's price has been horribly irregular and subpar other investments.
Even lowly Bonds have better long-term investment value.
>If this is payback, why were they kind enough to give us notice? They could've not given us notice and sold far more than they did.
Because it's the kind of muted, minor payback that two economies that are linked at the hip give each other.
China sells like $500B worth of goods to US every year. Rocking the US boat rocks their export boat which rocks the Chinese middle class. Creating economic instability in America would lead to political instability in China, methinks.
Yields rise, and the US government must now service a higher level of debt, pushing the deficit higher. US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line.
I'm not sure how this causes yields to rise. The short term interest rate is determined by the FED. If China sells off enough treasuries that the interest rate on them jumps to 1.0% then the FED will probably just buy more treasuries until the interest rate hits the zero lower bound again at 0% interest. This would stimulate the economy.
Correct, the Fed determines short term interest rate through Federal Funds Rate (FFR).
The treasury instruments we are discussing here are mainly 5-10 year notes and bonds. Thus the yields on these instruments reflect long term interest rates. The market, not the Fed, determines long term interest rates.
The long-term interest rate used to be much more closely correlated with the FFR. We see that it has decoupled significantly during the past 10 years and is now moving somewhat independently of the FFR. The Fed is stuck at the lower 0 bound and has no power over long term interest rates anymore. Janet Yellen has noted this publicly herself. [1]
What you are describing - the Fed purchase of more long-term US treasuries - is another wave of Quantitative Easing. The problem with QE is that, while it gives the financial system more liquidity, that liquidity has not passed on to the end consumers. So the Fed would be adding (potentially overpriced) liabilities to its already massive pile of debt in order to have a somewhat negligible effect on long-term interest rates, and to probably have no effect whatsoever on economic activity within the US. In short, it would be taking on more risk for relatively little reward.
Thanks, I missed in the original article that it mentioned 10 year notes. I assumed they were short term notes.
My understanding is long term interest rates = expected short term interest rate over the long term + premium for locking up money for a long time.
(if not then arbitrage would occur)
Assuming the premium for locking up money remains constant. The FFR over the next 10 years determines the 10 year interest rate. In this case the selling of Chinese long term debt shouldn't have much of an effect on long term interest rates except through the channel of changing the future expected FFR.
Yellen said
“The Federal Reserve’s control over longer-term interest rates is more indirect and more limited than its influence over the level of the federal funds rate.”
She is talking about how the Fed still has control over long term rates through the expectations channel mentioned above. Imagine Janet Yellen came out today and said they would not raise rates from 0% for 5 years no matter the economic conditions. Long term rate would fall as people would expect a lower FFR going forward.
Treasuries are sold at auction, so supply/demand factors in as well. Since treasuries have little to no credit risk and they're highly liquid, people are generally just concerned with inflation. As roymurdock said, the FFR has minimal impact on long term rates. Here's Bernanke saying the same thing:
"The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth — not by the Fed."
http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30...
Long-term interest rates = Expectations of Short-term interest rates + Expectations of future economic growth + Expectations of future inflation + Uncertainty
You're not really locking money up as (under normal circumstances) you are free to sell the treasury at any point after purchase.
The Fed has already distorted the market enough as it is; they are looking for a way to return to normal market conditions - hence the debate around when to finally raise the FFR and short term interest rates. Hypothetically the Fed can announce whatever it wants, but realistically it is extremely constrained in its actions at the moment.
Arguably, the most immediate risk from the Fed’s policies is that banks could use those newly created excess reserves too quickly. Banks now have an additional $2.6 trillion in excess reserves, which means that they can create up to approximately $26 trillion in new money.[21] In other words, banks now have the power to create more than twice the amount of money currently in the U.S. economy, thus heightening the risk of future inflation.[22] As the economy improves, the Fed may have to pay higher interest rates on these reserves to keep banks from dramatically increasing their lending. Paying higher rates, all else being constant, would exacerbate any “losses” suffered by the Fed, thus increasing the political problems discussed in this Backgrounder.
For those same political reasons, there are risks to the Fed simply holding all of these assets indefinitely because interest rates are expected to rise in the future. If those rates rise, the Fed would suffer “losses” due to paying higher rates on its liabilities than it receives on its assets, again putting the central bank in a difficult political position. Also, as the world’s largest debtor, the federal government is highly vulnerable to an interest rate shock that could make the federal budget deficit much worse. A rule of thumb is that every one percentage point rise in interest rates increases the budget deficit by about $1 trillion over a decade. The safest course of action, therefore, is to start undoing the QE policies by selling off these securities.
Securities sales are typically associated with contractionary monetary policies, but because these reserves are excess reserves, and since they have done little to increase economic activity in the first place, removing these reserves should not have an adverse impact on the economy. Nonetheless, the Fed should minimize any negative effects by announcing a deliberate plan to sell the bulk of these securities over, for instance, the next six years. The Fed can also partly offset (or sterilize) these sales with its normal temporary open-market purchases of short-term Treasuries.[23]
Even if long term interest rates are determined by the factors you mention. How does China selling bonds increase long term interest rates? Increase in expectations of growth or inflation? I could maybe see that both of those could be increased from a devalued dollar. But if that's how China is increasing long term rates it seems weird to think that inflation + economic growth would cause the US to service a higher level of debt pushing up the deficit and causing the U.S. to stifle growth and economic activity.
There is a relatively liquid market for bonds. Let's say I issue a bond today. I set the interest rate at 3% per year for 10 years. A lot of different people buy those bonds (for ease of math, assume that an individual bond is $100). If they do nothing, every year that someone owns bond they'll receive $3, then at the end of ten years they get the extra $100 back.
Let's say that one day later someone wants to sell all the bonds that they bought. Naturally more sellers than buyers for a market means that the price will drop. So the bond now costs $90 to buy. However it will still pay the (new) owner $3 per year and $100 back at the end, so it's effective rate of return is now above 3.33% [The actual rate is higher since you get more money back than the $90 you put in, but this is a good lower bound for the new rate of return].
Now I come back right after this price drop occurred and realize "Oh crap, I need to issue more bonds today!" If I try and set the same terms on the new bonds, nobody will buy them, since they could just buy the ones I issued in the secondary market and make more money for the same risk. As a result, I have to increase the interest rate I pay for future bonds I issue. Thus China selling bonds increases the long term interest rates.
Note that it may not increase long term interest rates in the long term, though :-)
So the general thinking is 10 yr treasury bonds reflect the economies consensus around what the long term interest rate is.
Another general consensus in economics is that the interest rate is determined by the supply and demand for loan-able funds.
Therefore if China sells so many bonds it increases the interest rate on 10yr T-Bonds. It has either shifted the long term interest rate in the U.S. by reducing the supply of loan-able funds or it created an enormous persistent arbitrage opportunity in T-Bonds.[0] Both of these seem very unlikely to me. 40 billion a month is just too small to make a difference.
I had never heard of Heritage before I read the article I posted, but I'm inclined to trust actual economic analysis and a clearly rigorous understanding of the situation over Krugman's little mantra.
From the little I've read of Krugman, I'm baffled as to how he received a Nobel prize. His opinion pieces in the NYTimes are TERRIBLE and seem to be written with one goal in mind: start as large of a flame war in the comments section as possible. That, and promote his books or whatever he is selling these days.
Also, you'd be a fool to just straight out ignore something because someone told you to. The least you could do is read and understand it to form your own opinion - then you can make an informed decision on its worth, rather than blindly following a pundit.
Yea, the Heritage Foundation is a right wing think tank known for very biased views. It's essentially an academic sounding mouth piece for the GOP establishment. It used to be more legitimate, but it's an outright political organization these days.
It just seems weird to worry about inflation and runaway depreciation when we are in an environment that has seen disinflation and dollar appreciation.
> but I'm inclined to trust actual economic analysis and a clearly rigorous understanding of the situation
You won't find that at Heritage, they do propaganda water carrying not serious economic research. Heritage is another incarnation of the scientists that worked for tobacco companies. The econmists that work at Heritage aren't paid to do real economic analysis, they're paid to support Heritage's policy positions with something that looks like real economic analysis.
> From the little I've read of Krugman, I'm baffled as to how he received a Nobel prize.
Uncontroversial pick, was one of the favorites.
> His opinion pieces in the NYTimes are TERRIBLE and seem to be written with one goal in mind: start as large of a flame war in the comments section as possible.
His opinions throughout the financial crisis have stood up as well as anyone elses, certainly much better than Heritage with their constant claims of QE leading to inflation.
> That, and promote his books or whatever he is selling these days.
'Don't trust anyone who writes books' is not a strong argument. Better advice might be, don't trust economic analysis that validates the preferred conclusions of the organization that paid for it.
> Also, you'd be a fool to just straight out ignore something because someone told you to.
This assumes my only reason for ignoring them is because someone told me to. No, I ignore them because they've time and again exposed themselves as hacks. Krugman's 'little mantra' is simply an easy to remember form.
> The least you could do is read and understand it to form your own opinion - then you can make an informed decision on its worth, rather than blindly following a pundit.
You'd be a fool to waste your time with parties who have already shown themselves to not be good faith participants. An informed person doesn't need to read your article from Heritage to know what it says about QE. It says QE is bad and will lead to inflation and perhaps other badness. An informed person knows this because that is what Heritage always says about QE, even years after they've been wrong over and over again. Informed people might be glad that they did not invest their money in line with Heritage's constant predictions that QE will lead to inflation.
> I'm baffled as to how he received a Nobel prize. His opinion pieces in the NYTimes are TERRIBLE and seem to be written with one goal in mind: start as large of a flame war in the comments section as possible.
The fed doesn't experience risk. It has full control over the size of its balance sheet. There may be other problems with QE4 in the form of Operation Twist II but risk to the Fed isn't one of them.
Also your claim that "the liquidity is not passed on to end consumers" besides being debatable, doesn't answer the claims made by the parent poster. If the Fed so chooses it can prevent yields from rising, which means that the US government will not have higher interest costs.
In sum, the entirety of your argument comes down to the something, something hyperinflation which your heritage link makes explicit. We've heard that story before. There's no reason to think it will be any more accurate this time than it has been for the last 50 years.
Every entity in the world experiences risk. If you can't identify it, you're not trying hard enough.
The Fed can prevent yields from rising through another round of QE. The tradeoff being that it will have to push even more money into the system, undermining confidence in the US economy's ability to operate healthily without serious Fed & government intervention.
I never mentioned hyperinflation because I don't think that's a realistic outcome of more QE. I don't think something, something hyperinflation is a good way to summarize my argument, but it is sure is patronizing, I'll give you that.
Can you provide an argument that explains why we would want more QE at this point?
I understand that. However what I don't understand is how the price of the treasury bond falls when there exists a buyer in the market that has an insatiable appetite for treasuries and a Scrooge McDuck sized wallet(The Fed). In economic jargon it would mean we currently have perfectly elastic demand for short term treasury bonds.
Short term rates are directly set by The Fed. (Notice I said "rates" not "bonds". In the jargon "Bonds" have terms of over a year. Bonds are not controlled directly by The Fed - only very short-term rates (typically just a few days).)
Long-term rates (i.e. Bond yields) are set by the market in which the The Fed is a major participant but not big enough to completely control the market. This was greatly expanded under the 3 quantitative easing programs but the last of these ended almost a year ago.
Also keep in mind that the US bond market is huge - around 40 trillion dollars - with treasuries only about 1/3 of the total. Even after all the extraordinary intervention by The Fed they hold around 10% of that total. China holds less than The Fed and much of that is not is US dollar bonds.
Are basic bonds beyond the grasp of this forum? High yields are low prices for the bond holders. So when people sell bonds, the price drops, which causes the yield to rise.
ams6110 is fully correct here and is stating simple facts of the bond market.
Because it's clear the person he's responding to understood that relationship. If he'd bothered to read all four sentences, it's clear he meant he wasn't sure why yields would rise if the Fed would react by buying bonds.
Perhaps it's getting downvoted because it's irrelevant to JamesBarney's point. The Fed (normally) sets (very) short-term rates; the market sets longer rates. But the Fed also can to some degree set longer rates by QE. And, in fact, the Fed can print more money than China can sell dollar-denominated bonds, and therefore the Fed can win the battle - if they want to badly enough.
Printing more dollars to buy bonds would counteract China's sale of bonds. I fail to see any way in which that is not clear.
> Rising long-term yields signal future inflation.
In this case, they would signal no such thing. They would signal sales by China's Central Bank. That is not related in any way to future inflation expectations.
Yields rise, and the US government must now service a higher level of debt, pushing the deficit higher. US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line.
I think one of the expected consequences of such uncertainty is the Federal Reserve fires up the printing presses and dive right in to QE4. Just a thought.
Given the fed's 4.5 Trillion dollar balance sheet[1] and paying 25 basis points for excess reserves [2] while getting 33 basis points on 1 year or more treasuries [3] I'm not sure I don't see any "US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line."
What I don't get is how this jives with debasing the Yuan. Won't selling Treasuries create demand for Yuan and drive up the Yuan price? Maybe They are selling Treasuries for another currency?
It will drive up the price of the Yuan - that's what the grandparent said. I don't know where you're getting debasing from?
Separately the Chinese government recently allowed the Yuan to float more openly. That's had the effect of debasing it, but it wasn't a goal - the point is to allow it to float at a market price (partly to make it more viable as a reserve currency), but the government wants to prop up its value.
I believe the mistake is to think one can design a reserve currency. The dollar is the world's first reserve currency only because the Bretton Woods monetary system defined it as redeemable for 1/35 ounce of gold after World War II. When the Fed defaulted on its gold obligations in 1971, the world got a reserve "currency" -- before the world reserve asset was gold.
I don't think any government can create an irredeemable credit instrument and have it accepted as reserve currency. Even the dollar as reserve currency had to come in the back door.
They are probably selling treasuries for dollars and adding them to their foreign currency holdings. Also, China can just print more Yuan if they want to debase it (they're a government; they can do that). Whether they keep the dollars as dollars is dependent on whether or not they think the dollar will rise in value relative to other currencies: it's just investment strategy at that point.
It can't be that since their foreign reserves which include foreign currency holdings are declining. The recent turmoil started with an attempt to lower their currency but this quickly got out of hand when their stock market crashed so they had to start supporting their currency. To do this they sold foreign assets for foreign currency which they used to buy their own currency.
Right; OP was asking why they would be supporting their currency if they were trying to devalue it.
And honestly, the "stock market crash" was just a correction. Yes, it declined by 50% over 2 months. But in the 9 months between September 2014 and June 2015 it had risen by over 250% - these most recent losses represent only about half of the total gains over the last year. China is a fast growing economy, and fast growing economies are volatile and prone to asset bubbles. Its economy is less reliant on its stock market than the US; hence the market can slide way, way further out of equilibrium than in the US because it's not as liquid and is only weakly tied to economic fundamentals.
I am not sure that 1% per month is small enough to claim that "probably won't have an effect on US economy". If it were a one off event, sure. But at the end of day the question is: for how long can these advances can be sustained?
At the very least, this will prevent US to capitalize on world wide instability by taking on more debt. I wonder if that is the purpose of the Chinese.
The worst-case scenario (large drop in demand coupled with large increase in supply of US treasuries) would probably only be triggered if China dumped a lot of treasuries on the market at once. Say, for argument's sake, 50% of their holdings in one week. This would signal US treasury weakness and would flood the market with a ton of extra US treasuries.
They are currently selling treasuries off at the rate of ~1% of their total holdings per month. So I assume that fear over an uncertain stock market + investors looking for a good opportunity to pick up cheap US treasuries will provide enough demand to soak up the new supply of treasuries that are trickling into the market.
China's Treasury holdings dwarf all but a few nations, and it's by far the largest holder, excluding Japan which tails only slightly. "Carribean Banking Centers", oil exporters, and Brazil follow, the last with only just over a quarter of China's holdings. Few emerging countries have any significant holdings.
Of course, major foreign holders only hold a third of the total Treasuries. US Government agencies actually own another third of the debt, and the US public owns the last third.
Government spending on capital projects generally causes an increase in economic activity. The government initiates economic activity, which causes companies to hire more workers, invest in new equipment, purchase supplies, etc. That all eventually makes its way into peoples' pockets, where they spend the money and throw it back into the economy. Capital projects tend to have an outsized impact because much of the economic activity required to build them wouldn't be practical to source from outside the US (you would never buy concrete from China, for example).
Furthermore, assuming the capital projects filled a gap in the economy, they may make it easier to do business such that companies can operate with reduced costs relative to global competition. That would be a secondary effect from having improved infrastructure, but it would be much longer-lasting than the primary effects.
> How does the American governments NOT spending money stifle growth?
The same way any other market participant (or set of market participants) not spending the same amount of money reduces growth compared to what it would be if they did.
Activity that isn't happening in the economy is directly a reduction in the size of the economy.
-- Hiring freezes, or even furloughs or layoffs
-- Delays in capital projects (new buildings, bridges, airports)
This means less money in the pockets of employees, as well as less money to contractors, who have less money to pay their employees and suppliers, and so on. If people have less money, then they can't spend as much money, and thus the economy grows less fast, or stops growing.
In theory the government would have to reallocate money from something else in order to pay a higher interest rate. Thus they are not really spending any less. In practice the Federal Reserve takes up some of the burden by buying up Treasuries.
You're general idea, though, is correct. Government spending is a burden on the economy. It reallocates resources away from the market. The main metric which is supposed to measure the health of an economy, GDP, is faulty in part because it includes government spending.
Growth is just change in total spending (= total selling). Less spending by one of the biggest spenders means less growth. The is the essence of "fiscal policy"[1]. Of course much of this is offset by the the need to fund this spending through borrowing, taxes or printing money (i.e. inflation) - at least eventually.
You typically have to be a Keynesian (or related school of economics) to believe that.
Governments get their spending cash from taxation and political control of the monetary authority. In order to exert economic influence, they first have to take some away from the actual producers of marketable goods and services. Thanks to the way money works, if they don't expand the amount of currency in circulation by spending what they created by fiat, the value remains with the producers, who continue measuring their prices by the smaller amount in circulation. In metaphorical terms, no one can listen to what you want to say if you do not speak.
The one and only way that government spending can produce more growth than ordinary individual spending is by ordering construction or repair of capital infrastructure that benefits multiple businesses who would individually be unable to justify the expense of the improvement.
Business A and business B are competitors, and they would both benefit from roads that connect them to a highway network. A is unwilling to assume the expense of building a road to the highway unless A could exclude B from it. B feels the same way about A. If either notices the other building a road, they know that money is not available for other purposes, so whoever makes the first move could lose market share thanks to a strategic counter-move. Instead, government G takes somewhat less than the full amount needed for one road from each, to build a single public road that serves both equally. Both businesses get their road to the highway, but neither had to pay the full expense individually. Growth occurs by breaking the Nash equilibrium that was preventing it.
That's the ideal case. Usually, government spending is no smarter than handing a wad of cash to the village idiot, so it has no greater effect on growth than ordinary consumer spending, minus the deadweight loss. Also, if G takes a full road's worth of economic influence or more from both A and B, and builds only one complete road or just a partial road with it, neither A nor B is any better off. In order to promote growth, the government spending has to buy something of actual value to the public, at a lower cost than the sum of costs that individuals would pay for the bits of the "something" that benefit each of them most.
The public usefulness of a "something" is often a matter of opinion, so the "growth" thing is almost pointless to argue about.
Yours is an extremely simplistic and naive view of how the real economy works.
Government spending can be a net gain or drag on an economy but it can be a big boost in certain circumstances:
1) When the private market is retracting the government can offset that somewhat and create a "softer" landing. This prevents over-shooting on the underside (think the Great Depression). The lower interest rates are the better the bang-for-the-buck you get from government spending. When the world is clamoring to give you their money at negative interest rates (paying you to take a loan!) you'd be a fool not to pull the trigger on every capital project and bit of maintenance you can... which of course since we are so full of Republicans in the US we have been fools and haven't taken nearly as much advantage of the situation as we should have. As rates rise we'll end up doing the same projects in the future but pay higher interest rates to do them.
2) In an environment of excess capital (e.g. where the top 1% have most of the money) there is far too much cash looking for a productive place to invest and too few good investments. Again in that environment the government can do a lot of good by confiscating the capital (temporarily as you'll see) and giving it to the bottom 95%, ideally as free money with no strings attached. The vast majority of it will be spent, returning directly to the 1% who held it in the first place. The overall velocity of money will increase. This is the exact same thing as SF being dragged down by high rents writ large (if rent were reasonable I would personally create a job by hiring a nanny; instead that money goes to my landlord's retirement account where it chases all the other dumb money looking for yield)
Government spending (and high taxes) can be a drain under different circumstances:
1) If there is a deficit of capital to finance good ideas or productive businesses, the economy can benefit from lowering taxes on the 1% to free up capital. One could argue this was the case when income taxes were 90+% during the supposed "golden post war era" that today's idiots fondly recall with rose-colored glasses.
2) If spending is done via printing money or the overall debt load is too high then you can cause high inflation which has its own negative effects. If your debt is denominated in a currency you don't control (or in gold) then this can be a double-whammy and cause hyperinflation.
Government in general can be well-run and more efficient then the market when you are talking about absolute necessities and natural monopolies (like health care or roads), assuming you were willing to pay good salaries and benefits to attract the best workers and don't try to outsource everything. None of that applies to today's US or state governments... we pay like crap and purposefully use contractors for everything. It doesn't work well anywhere else, why would that work for government?
You opened with an ad hominem; that's rude and unproductive. Besides that, I don't find what you say to be contradictory to my own views.
Boost 1 is an example of breaking Nash equilibria. In a contraction, the individual optimal play is to turtle up, but the overall optimum is to keep the spending going at a slightly lower rate. So the cartel enforcer takes from its members the amount that should be spent and spends it. The error made in practice is that most governments borrow from their central bank at interest rather than raising the cash directly via a capitation with deductions for actual consumer spending. Or they blow the cash on stupid purchases, forgetting that how the money is spent is usually more important than the size of the amount.
Boost 2 tends not to happen much in practice, thanks to government corruption and prophylactic bribes by the rich, but when it does, it may trigger capital flight. The Hollande 75% tax in France prompted a few celebrities to leave, but the reality is that rich people have been fleeing high French taxes for decades. Shuffling the currency around has little impact if it does not also change the ownership distribution of revenue-generating assets. If the poor people took their free money and bought shares of profitable businesses with it, that would help. But they tend to buy food, utilities, consumer goods, and rent instead. As such, this redistribution plan is a temporary improvement at best.
Drain 1 is not quite the polar opposite of boost 2. When you give rich people more disposable income, they tend to buy more revenue-generating assets, rather than more consumer goods. Once you have one luxury yacht, there isn't much of a reason to buy another. They don't charitably pay others to develop their good ideas; they buy them outright, and reap most of the benefits for themselves. They do very well, and that does not trickle down to the lower classes in practice. Investment does not circulate the currency down in the same way that spending does. Investment attaches burdens and obligations to the money before handing it off to someone else. It slows the money down. Think about how you might feel if someone handed you a $100 bill that was wet and sticky, with strings attached worth -$50 to you, in comparison to someone just handing you a clean, dry $50 bill, that you could use as you pleased.
Drain 2 is mostly accurate, except I would say that printing more of a fiat currency is always an absolute drain on the economy, when considered in isolation from whatever is done with the new cash. If you do it at all, you are starting in a hole and need to do a whole lot of good to even get back to ground level. Politically, you often see someone touting the good done with government spending, while if you pull back a bit, you see that it doesn't even make up for a small fraction of the damage done by the currency manipulations required to pay for it.
Government's primary value is as a cartel enforcer to break Nash equilibria, wherein the cartel members are forced to act in a way that is sub-optimal for themselves, but which results in an overall better outcome for all participants. Taxation always results in a deadweight loss, except when the good in question has zero or infinite slope on the supply or demand curves. Monetary inflation creates a value gradient in the currency that complicates calculation, and generally enriches those closer to the monetary authority at the expense of those further from it.
Government can also prevent tragedy of the commons, by restricting the exclusionary uses of public goods.
These functions typically result in greatest efficiency during the reign of the generation born to the revolutionaries. The true believers try to make the government work correctly and efficiently for everyone. But then, some time after, the rot sets in, and people start to use government as a means to promote their own rent-seeking behavior. You simply can't create a tool that only be used for good and never for evil. The dinner knife can spread shit just as well as it spreads butter.
China sells US treasuries in order to appreciate Yuan relative to USD.
Supply of US treasuries on the market increases.
Demand for US treasuries decreases due to concerns over a large enough Chinese sell-off. Demand for US treasuries increases due to uncertainty over the stock market. Net effect on demand is uncertain.
Assuming worst-case scenario (for the US) in which supply of US treasuries increases and demand decreases: Yields on US treasuries increase as investors with less demand must be compensated for taking on a riskier and more plentiful asset.
Yields rise, and the US government must now service a higher level of debt, pushing the deficit higher. US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line.
Bottom line: This probably won't have an effect on US economy as investors need somewhere to park their money that is not the stock market. Also, the scale at which China is selling off treasuries is assumed to be pretty small ($40bn/mo compared to $3.65tn total holdings).
Now if China initiated a mass sell-off of all of its US treasuries, there would be huge ramifications. But in its current form, this seems to just be one more way for China to slowly unravel its position in US treasuries while playing with the value of the RMB.