Fed Cuts Rates, China & Japan Lead US Debt Sell-Off

• Article
• 2024-08-01
• 20 Comments

The Federal Reserve announced a rate cut of 50 basis points this month, marking the first interest rate reduction in 4 years, and it was a significant one at that, seemingly exceeding expectations, but for Wall Street, it was all within the anticipated range.

As soon as the Fed cut rates, major holders of U.S. debt such as China and Japan began to sell off their holdings, while the United States faced two major crises internally.

When an avalanche occurs, no snowflake is innocent; instead of expecting the illusory prosperity following a rate cut, it's better to think about how to avoid risks and prepare in advance.

1.

The Fed's 50 basis point rate cut, a risk not to be ignored: When the Fed hadn't cut rates, almost the whole world was eagerly anticipating it, as everyone was struggling and times were tough.

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But now that the rate cut has happened, it seems to have made little difference, and many are feeling disappointed.

In fact, many people had set their expectations for the Fed's rate cut too high, idealizing it.

In reality, the Fed's rate cut is the beginning of the crisis, the start of the real contest.

Historically, every time the Fed has cut rates, it has been accompanied by a global financial or economic crisis, and this time will be no exception.

Don't forget that the Fed's rate cut this time was a drop of 50 basis points right off the bat, a move that usually indicates intense internal strife and a worsening crisis that can no longer be observed through current data.

The U.S. economic data may no longer reflect the true state of the economy, as it always needs to be "revised" afterward.

2.

China and Japan take the lead in selling U.S. debt: On the same day the Fed cut rates, the U.S. Treasury Department released the capital flow report for July of this year.

According to the report, China, Japan, and the UK, as the top three "debt lords" of U.S. debt, once again took the lead in selling off U.S. debt.

Since the data released by the U.S. has a two-month delay, the July data is the most recent available.

First is Japan, the country with the most U.S. debt holdings, which reduced its holdings by $2 billion that month, falling to $1.11 trillion.

Don't just look at the reduction in one month; Japan has been reducing its U.S. debt holdings for four consecutive months, starting in April, when Japan opened the channel to sell U.S. debt, accumulating over $70 billion in sales.

Our country reduced its holdings by $3.7 billion that month, falling to $776.5 billion, still the second-largest overseas holder of U.S. debt.

Although there have been reductions and increases this year, the overall trend is still one of reduction, with a general contraction in U.S. debt holdings.

The UK reduced its holdings by $13.2 billion that month, ranking third in U.S. debt holdings, just behind Japan and China, and France also reduced its holdings by $16.3 billion.

Among the top ten holders of U.S. debt, six countries reduced their holdings that month, and four increased them.

In fact, it's not just the three countries of China, Japan, and the UK selling off U.S. debt, even the Fed itself has been continuously reducing its holdings.

Since the Fed began to shrink its balance sheet in June 2022, it has been reducing a certain amount of U.S. debt every month.

The pace of reducing U.S. debt has slowed since June of this year, but it still reduced its holdings by $25 billion in September, so the Fed's monthly reduction is more than the combined total of China, Japan, and the UK.

The Fed has already announced a rate cut, so why hasn't it started to expand its balance sheet, but continues to shrink it?

In fact, it has always been the case that the Fed cuts rates first, and only when a serious crisis occurs will it start to expand its balance sheet, such as when the U.S. was hit by the pandemic in 2020 and the stock market circuit breakers were triggered, the Fed urgently started QE to flood the market and began to expand its balance sheet.

At this interest rate meeting, Powell clearly stated that he would not stop shrinking the balance sheet, and at the same time as the rate cut, he would continue to shrink the balance sheet.

This situation is very rare.

If one day the Fed is going to start expanding its balance sheet, it means that the real crisis has arrived.

3.

The United States encounters two major crises: It can be clearly said that this time the Fed's rate cut is a recessionary rate cut, a compromise and concession rate cut, because in this round of the dollar tide process, Jewish capital did not get the desired results, and the power of the dollar tide has been greatly reduced.

The first major crisis the United States is facing now is the failure of the dollar tide to harvest, and the dollar's hegemonic status has been impacted.

In the past, every dollar tide could blow up large economies through the operation of raising and lowering interest rates, and then lower interest rates to flood the market and bottom out other countries' high-quality assets.

But this time, the dollar tide has encountered an unprecedented defeat.

Wanting to harvest the East, but failing at every step, and finally having no choice but to harvest Japan, only to be counterattacked by Japan's continuous sale of U.S. debt, and Japan also said it might raise interest rates.

This time, the failure of the dollar tide to harvest, and the next time it wants to repeat the old tricks will be even more difficult.

This is a blow to the dollar's hegemony.

Secondly, the second major crisis the United States is facing is the debt crisis.

On the premise of a failed harvest, the U.S. national debt has reached $35.35 trillion, debt interest expenditure has broken through $1 trillion, fiscal deficit is approaching $2 trillion, and the debt and fiscal crisis is continuously intensifying.

If the dollar tide harvest was successful, the United States internally has already started to divide the spoils of victory, but this time the harvest failed, and the internal struggle in the United States will only become more intense and cruel.

Faced with the overwhelming debt, it can be imagined that the United States' next operation will definitely trigger a new round of financial crisis.

In the past, 1-3 years after the Fed cut rates, the world would experience a financial crisis, but this time it won't wait that long.

It's best to prepare in advance, and ordinary people should try to avoid any investment, do their own work well, and think about what needs to be prepared to get through the financial crisis safely.