Leaders of the so-called BRICS grouping this week are meeting in South Africa in an attempt to create an alternative order to the one where the U.S. and its Western allies dominate.
But one misconception is what it is they are trying to achieve in financial markets. Michael Pettis, senior fellow at the Carnegie Endowment and a professor of finance at Peking University’s Guanghua School of Management, took to social media to attack a quote from Zoltan Pozsar, the former Credit Suisse and U.S. Treasury official well known for his understanding of the global financial system’s intricacies.
Poszar was quoted as saying: “The west dreamt of the Brics as a lapdog, that they would accumulate dollars and recycle them into Treasuries, but instead of that they are renegotiating how things are done.”
Pettis pointed out that it was entirely backward. If the U.S. wanted China and friends to buy Treasurys, to lower the cost of financing, that would imply the U.S. wanted them to run large trade surpluses. U.S. policy has run in the opposite direction by imposing tariffs on China and publicizing countries that manipulate their currencies.
“Net foreign purchases of U.S. assets is just another name for U.S. trade deficits, and the U.S. has been eager to reduce its trade deficits, which is just another way of saying that the U.S. wants foreigners to stop buying U.S. assets,” he said.
Furthermore, unlike in the 19th century, savings are abundant rather than scarce. Pettis says net foreign inflows either reduce U.S. savings or increase U.S. debt. And moreover, China, India and most of the BRICS grouping are looking to bolster their exports. “This means they are eager to run surpluses and acquire foreign assets,” Pettis said.
That’s not to say that China, or Russia for that matter, are currently buying Treasurys; in June, China’s holdings fell to a 14-year low, though it’s still at least the No. 2 foreign holder after Japan. (China may hold U.S. Treasury securities in other countries, making an exact classification difficult.)
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
this week reached a 16-year high.
Brad Setser, senior fellow at the Council on Foreign Relations, posted one addendum while agreeing with Pettis: those flows aren’t currently being renegotiated; they stopped about 10 years ago.
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