Warning: China propping up their economy by “selling” U.S. Treasuries

"The Fed doesn’t fully understand the market volatility that stemmed from China’s shift in its foreign exchange regime" commented Fischer in a media interview in Jackson Hole, Wyoming.   (See CBS MarketWatch, August 28, 2015)  Even the U.S. Federal Reserve  isn't clear (or willing to share) what is really going on, so investors may want to get the facts for themselves.

The knee jerk reaction in the media that the Chinese were devaluing the Yuan on purpose shows how shallow U.S. reporting on financial markets has become.  The facts are that there is a capital flight out of China that has been putting severe downward pressure on the Yuan.

The Chinese did not “devalue”, which implies they are playing the typical mercantile economic game of manipulating their currency downward against the dollar to improve trade by "buying" U.S. Treasuries.  To the contrary, the Chinese had to "sell" $100B in U.S. Treasuries (See Bloomberg News, August 27, 2015) just to maintain the peg they have set against the U.S. dollar for the Yuan in order to support their own their own declining economy.

What this means to the Fed is that financing the U.S. debt has just reached a tipping point.  What China did by selling $100B U.S. Treasuries will have the same effect as the FED buying Treasuries.  It floods the market with more dollars.  The problem in this instance is that the FED now faces the real possibility that it might be the only buyer left that wants U.S. Treasury paper if this trend continues.  Raising rates is very likely to become the only means the Fed has to support the huge financing appetite of the U.S. government since the supply chain from emerging market mercantile economies like China and petrodollar fixed income supplies from Saudi Arabia are beginning to dry up.