Philip Pilkington Profile picture
May 19 15 tweets 6 min read Read on X
1/ Here is a thread on why recent record sales by the Chinese of US Treasuries might be one of the first signs of a major fiscal crisis in the US. There is a lot of confusion about how this would work so let's go through it step by step. Image
2/ What matters here is not overall US government debt but rather the balance of payments. If a country runs a trade deficit this must be offset by financial inflows on the financial account to maintain equilibrium. Image
3/ The United States runs a consistent, large trade deficit. As predicted - because it is a necessity - this trade deficit must be matched with financial inflows. Let's look at what those inflows are. Image
4/ Here we see that the most important component by a very large amount as 'Debt Securities' that are 'Long Term'. In 2023 $924bn were issued and $103bn bought, meaning net issuance of around $821bn. Image
5/ These are the key balancing item that allows the US to run its trade deficit. What are they? A lot of them are Treasury bonds. Image
6/ It used to be that these bonds were bought by China and other governments/central banks. These were stable buyers because it was part of their trade strategy - prop up the US trade deficit to sell more exports. Now increasingly they are bought by private foreign investors. Image
7/ These investors are buying Treasuries because interest rates are high. Right now they look like an attractive investment. But these investors are 'yield sensitive' and so if interest rates come down they will likely dump the bonds. Image
8/ This will likely happen in a recession when the Fed lowers rates to counteract the downturn, maybe even more QE. And in a recession tax receipts will fall and unemployment claims will rise - so the US will need to issue even more debt. This will only exarcerbate the problem. Image
9/ All this is coming on the back of a major Russian-Chinese economic and military alliance that explicitly pushes for a multipolar world order. Image
10/ Smart strategists on Wall Street understand what is happening, but if you look in the mainstream financial press you will not see any of these stories anywhere. Image
11/ It appears that those who publish these papers still think 'narrative control' is meaningful. But it no longer is. Only hard economic realities matter now and so the Western press has become like Pravda - a Potemkin Village built for Western leaders to deny reality. Image
12/ Being blissfully unaware of what is actually happening Western leaders continue to think they control the situation and go around making demands on the Chinese. The Chinese are baffled by this, knowing that they are the United States' creditor. Image
13/ And so the Chinese just keep offloading US Treasuries, handing them off to yield sensitive investors while recycling the money into gold. Image
14/ How much could living standards fall? It is hard to tell. Simple modelling suggests that US living standards are around 27% too high relative to their trade deficit. Image
15/ The people who understand the dynamics at play wait for a recession to kick off to see if lower rates and higher debt issuance will lead to foreign investors dumping Treasuries and forcing the US trade deficit to close - and living standards to fall accordingly.

END/ Image

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More from @philippilk

Apr 22
1/ A new paper is out with the @hiia_budapest. In it we explore reindustrialisation. With governments across the world waking up to the catastrophe caused by a decline in manufacturing we want to explore what reindustrialisation might entail and what might constrain it. Image
2/ Do not believe those who tell you deindustrailisation is driven by technology. A portion of it is, but most of it is a redistribution of manufacturing capacity from the Western countries to the emerging BRICS+ bloc - especially China. Image
3/ Some countries try to build manufacturing sectors by attracting FDI. Good news for countries with higher wages: only a weak correlation between wage rates and FDI. So, wealthy countries can attract FDI without crashing living standards. (BRICS in red, West in blue). Image
Read 8 tweets
Mar 13
1/ Ever since the pandemic the Western world has started to talk about ‘derisking’ and ‘decoupling’ which are both euphemisms for increased protectionism in the West, especially vis-a-vis China. A study I worked on with @hiia_budapest shows that this has not been thought through. Image
2/ Through globalisation the world has become highly interconnected. It used to be that China relied heavily on imports but now the EU is more reliant and the US is as reliant. Image
3/ Nor are many of these imports from other Western countries. The EU is as reliant on imports from BRICS+ as China is on imports from the West and America isn’t far behind. Image
Read 10 tweets
Jan 11
1/ In conjunction with the @hiia_budapest I will be working on a comprehensive series of economic studies on the emergence of the multipolar world in the 2020s. In the first othis series, we explore the Origins of Economic Multipolarity. Highlights in this 🧵. Image
2/ China overtook the US and the EU as the largest economy in 2017, but little attention was paid to this because of a flood of fake economic metrics (details in report). Image
3/ Following on from this, the new BRICS+ that added new members in August of this year, is now as large as the entire West in terms of its total economic size. If more members join from the shortlist it will be substantially larger. Image
Read 8 tweets
Nov 1, 2023
1/ In our new paper demographer Paul Morland and I argue that Western countries facing low and falling birth rates are confronted with a trilemma. They can only pursue two of three possibilities: economic dynamism, ethnic continuity, and egoism. @arc_forum Image
2/ Countries like the United Kingdom can barely reproduce itself. Deaths in the country are close to outstripping births. Extremely high immigration rates are needed to keep the economy rolling. Image
3/ Immigration can be healthy. But at a certain point it becomes destabilising, both politically and socially. Rates of immigration can, for example, predict income inequality, as low-skilled migrants are forced to become a self class. Image
Read 10 tweets
Oct 26, 2023
1/ Iran are making big threats against the US. Some may be inclined to dismiss this. After all, isn’t Iran a third rate power and a hermit kingdom? A sort of Middle Eastern North Korea? Maybe not. 🇮🇷🇺🇸🇮🇱
2/ Iran has a huge missile stockpile. These include around 3,000 ballistic missiles that can strike anywhere in the Middle East. Image
3/ They have also been heavily investing in building drones. Here is the latest - apparently. But even the cheaper stuff seems pretty effective. The Shahed has been used extensively in the Ukraine conflict. The Russians keep buying them, so they must be effective. Image
Read 12 tweets
Oct 19, 2023
1/ I’ve spoken to numerous people this week, including some with experience in Middle East politics, who realise that the region is about to destabilise again. But they also think this is just part of the cycle, every ten years it falls apart there. But this time IS different. 🧵 Image
2/ There is no doubt that the Middle East is a powder keg. It always has been. Many of its borders were drawn only a century ago, in line with Western interest. It remains true that the region is a powder keg, it does NOT remain true that it is still a “playground of empires”. Image
3/ Until recently the West still had a lot of leverage in the Middle East. Its main friend and ally, apart from Israel, was Saudi Arabia. Sometimes the friendship soured - as in the Yom Kippur War and the oil embargo in ‘73 - but it survived those periods. Image
Read 14 tweets

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