It is all over the news. Countries are dumping US Treasuries. This means they are getting away from the US Dollar (USD).

After all, aren't the BRICS about to bring out their own global reserve currency?

Actually, the answer is no.

People keep missing some fundamental aspect to these entire discussion. For that reason, we see many espousing what turns out to be completely misleading.

Of course, a little investigation tied to logic will reveal what is actually taking place. This is why the masses are wrong so often. Listening to total garbage only leads to a bad outcome.

So what is going on with the second and third largest economies? Why are those nations unloading Treasuries like there is no tomorrow?

Source

De-Dollared

It all starts with the understanding what is taking place. Many feel that these countries are de-dollarizing. This means they are moving away from the USD to other currencies. This is not what we are seeing.

What is actually occurring is these countries, along with many others, are being de-dollared. They are not moving to other currencies. Instead, they are finding themselves without access to USD.

Remember when we discussed the fact there is a dollar shortage around the world. Many do not believe it since they buy into the idea the Fed prints USD. It does not. Rather, the Fed creates reserves which have no applicability outside its depository member institutions. This is not legal tender, which is exactly what the USD is.

This situation is prevalent throughout the entire banking system. There is a massive dollar shortage coupled with the same in collateral. This is causing a contraction of balance sheets which is hurting the ability for entities to operate.

So what does this have to do with China and Japan?

The answer is simple: companies in those countries have a lot of debt denominated in USD. Remember Evergrande and how much it off-shore debt it has? They are not the only entity in this situation.

Where this becomes a problem is that, even for companies that are looking to make the payments, they need USD to do so. Therefore, the commercial banks need to have dollars on hand. The companies do business in either Yen or Yuan and have to convert it to USD. This is how the payments are made.

So if the country is de-dollared, i.e. cannot get enough USD, it has to take steps to ensure it can provide the necessary currency. Here is where selling of US Treasuries comes in.

Future Dollars

Treasuries are bought for many different reasons. At the present moment, a large amount of buying is done for collateral purposes. Since there is not enough USD, banks are picking up Treasuries, especially T-bills, to get the best rates on the lending market.

This is also, by the way, why Japanese and Chinese companies would take on debt in USD. If you want to best rate, with the least amount of collateral, do the deal in USD.

When a Treasury is purchased, the currency used is USD. Throughout the term, the payouts are USD. At redemption, the money returned is USD.

In essence, US Treasury bonds (and bills) are future dollars.

US Treasuries are the most liquid asset in the world (next to cash). The market is always there although particular bonds might be non-liquid at times (off-the-run). This is why T-Bills are so desirable: they are always on-the-run (liquid).

Here is a way for countries to feed their companies the necessary USD that is required. They can enter the bond market and turn the Treasuries into cash. Since there is a shortage of collateral, most anything outside the 20 year will have a fair amount of liquidity.

Thus, these nations are battling an issue of being de-dollared, not de-dollarizing. They really have no option since there is a shortage of USD around the world. With the Eurodollar system struggling, the necessary funds are not finding their way to where they are needed around the world.

Once again, do not believe the rhetoric that is on CNBC or Bloomberg. They are misleading people completely.

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