Deutsche Bank, Bloomberg Finance LP
For instance: what if the debt ceiling isn't raised in a timely manner, and the U.S. defaults on its debt for political reasons?
Pursuant to that, who should be most concerned in such an event?
Bilal Hafeez, Deutsche Bank's global head of FX strategy, says it's China.
Data from the U.S. Treasury and the Federal Reserve show that China is the third-largest holder of U.S. government debt, with a $1.135 trillion portfolio of Treasury securities. The U.S. Social Security Trust Fund is the largest holder ($2.672 trillion) while the Federal Reserve is the second-largest ($2.077 trillion).
In a note to clients, Hafeez writes:
Looking at the top holders of U.S.
Rapidly industrialising Japan felt the full effects of this, and moved off the dollar peg. Economically it was only until the late 1980s that the Japanese growth engine fell apart, but the immediate consequence of the Nixon shock was a dramatic rise in USD/JPY volatility as Japan moved to a free-float. Should the Chinese and other countries lose faith in U.S. Treasuries, their response could end up being similar: a move away from a managed peg against the dollar, and towards a free-float. The immediate benefit would be that reserve accumulation and hence U.S. Treasury buying would no longer be needed, but the necessary cost would be much higher FX volatility. Perhaps it's time to read "Lü` ji¯da`n he´ huo?tui?."
"Lü` ji¯da`n he´ huo?tui?" translates to "Green Eggs and Ham," the title of a Dr. Suess book read aloud by Republican Senator Ted Cruz in his 16-hours-long filibuster against Obamacare last week.