Can Russia Wreck the US Economy?

In the midst of hostile Russia-US rhetoric over the Ukrainian Crisis, the Russian Government has threatened at times to dump their portfolio of US Treasury Securities. According to the Russian Government, this has the potential to send the American economy into a death spiral. Furthermore, many believe that Russian tentative ally China would follow suit and also cease to hold US Treasury securities.

Is there any truth to these threats? Do they hold any weight? I say “No”.

To begin with, let us consider how much of our debt the Russian Central Bank actually holds. You can see it here. As of December 2013, the Russian government held $138 billion in US debt. Really, this is not very much. Our own Federal Reserve purchases roughly $50 billion in Treasury Securities every month. In any given 2.5 months, the Federal Reserve purchases as much debt as The Russian government holds in total. If the Russian Government dumped their portfolio, the Federal Reserve would buy it. No big deal. Nothing much would change. The Fed Funds rate would stay the same.

Furthermore, notice the trend in total Russian government holdings of US debt: the number has been decreasing for the past year. Has it caused any trouble in the economy or markets? No. The markets don’t care. So the Russian government could sell it’s holdings of US debt, the Federal Reserve could buy it, and the markets would probably not care. Business would continue as usual.

Then, there is the speculation that the Chinese government might follow suit. This is nonsense. It would never happen. The Chinese government holds a very large amount of US debt, approximately 10x more than the Russian government holds. If the Chinese government dumped their portfolio of US debt, I readily submit that this could cause a severe recession in the United States.

How, though, is it in China’s interest to cause a severe recession in the US? The Chinese economy can be summed up as “The World’s Largest Bubble”. The bubble stays inflated through a policy of mercantilism, meaning that the Chinese government buys US debt in order to devalue the yuan and make exports cheaper. If the Chinese government dumped their portfolio of US debt, the yuan would rise drastically against the dollar. This goes against everything the Chinese government has pursued for the past 30 years. They have established themselves as the low-cost factory of the world. If the US markets suddenly stop buying Chinese exports, the Chinese economy would utterly implode. The “Communists” in the Chinese government would never do this. They may be rotten guys, but they’re not stupid. 

Do not be cowed by these threats from the Russian government. Do not be cowed by “economic apocalypse”-types who predict that Russia and China will wreck the US economy. The Federal Reserve does a good enough job of that on it’s own. 

 

 

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