US Let China Buy Treasuries Directly During Debt Ceiling Crisis

Reuters has a story on how the Treasury Department allowed China to start buying US Treasuries directly last June.

The documents viewed by Reuters show the U.S. Treasury Department has given the People’s Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011.

China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market.

The change was not announced publicly or in any message to primary dealers.

Now, Reuters offers a number of potential reasons why China might want to do this: it would get a better price by by-passing Wall Street, it reflected growing confidence its money managers could buy debt more efficiently than through primary dealers.

But I can’t help notice the timing.

Last summer, just as it was becoming increasingly clear that Republicans were willing to crash the economy to win the debt ceiling debate, China started buying US debt directly.

I have no idea whether that would enable Treasury to exceed the debt limit without notice–assuming everything else worked the same, it presumably wouldn’t. But as Reuters reported last year (almost at the same time this latest change was taking place), when China wanted to keep buying 30% or more of our treasuries at auctions in 2009, we fudged the rules to allow them to do that. Then by letting China buy directly last year, as The Big Picture shows, Treasury gave the appearance that China was net selling debt, rather than (presumably) continuing to buy a great deal of it.

At the very least, then, the Obama Administration has twice enacted ways to hide the degree to which China has us by the balls, keeping interest rates low while gaining more and more of a threat over us. Given the timing, though, I can’t help but wonder whether it also serves to hide something else about our debt.

And–as Reuters implicitly notes–this change also means we willingly gave the greatest hacking entity in the world direct access to our Treasury auctions.

To safeguard against hackers, Treasury officials upgraded the system that allows China to access the bidding process.


The United States has, however, displayed increasing anxiety about China as a cybersecurity threat. The change Treasury officials made to their direct bidding system before allowing access to China was to limit access to the system to a specially designed private network connection controlled by the Treasury.

Oh, okay then. Because the specially designed private networks DOD runs on have proven so resistant to China’s attacks.

20 replies
  1. emptywheel says:

    @P J Evans: I don’t think it’s a matter of dimness. I think it’s 1) desperation and 2) addiction to power.

    I honestly think we could have made a nice transition to post-Empire under Cheney, but instead he decided to double down with the Iraq War. But now we’re fucked one way or another, and you can’t really say, “I’m going to ease the American Empire into graceful retirement, to hell with the centrality of American exceptionalism to most American’s sense of self-worth” and get reelected.

  2. bmaz says:

    @emptywheel: Yeah I agree, they are all, well – no other perjorative is needed – politicians, who want to maintain their fiefdom. Neither side wants to be the one that gives the Jimmy Carter “we are screwed, put a sweater on” admission as to the decline and fall of the US and how bad off the economy still is.

  3. EH says:

    Jonathan Schwartz’s Iron Law of Institutions has been front of mind for me lately. I think bmaz or someone Tweeted it a month or so back.

    “The Iron Law of Institutions is: the people who control institutions care first and foremost about their power within the institution rather than the power of the institution itself. Thus, they would rather the institution “fail” while they remain in power within the institution than for the institution to “succeed” if that requires them to lose power within the institution”

  4. bmaz says:

    @EH: Well, I agree with the sentiment completely, but, alas, was not me.

    JD McKay delved into it over a year ago here. I think that is likely what you saw.

    Damn, once I was in that post looking for JD’s comment, I ran into a whole slew of comments from Mary. Now I haz a sad. I miss Mary.

  5. EH says:

    I should have put a grocer’s question mark on that assertion. :) Life gets lost among the tweets.

  6. mzchief says:

    @EH: We are seeing it with, in essence, the death sentence of a whole society (Japan) by the nuclear bankstas who don’t want to be pulled off the teat. So US interests have a role in holding the situation in place with Japanese interests while using the situation to help sell the Chinese people further down the nuclear river. Meanwhile, the people in N. America are right in harm’s way (first West then proceeding East) if the situation gets worse which looks like a strong and imminent probability if there are not the proper interventions.

  7. mzchief says:

    OT– If you haven’t see this:

    Trevor Timm ‏@trevortimm
    Why the right-to-record is so important: Arrested #OWS reporter exonerated in court by @timcast video, showed cops lied
    5:24 PM – 26 May 12 via web · Details

    There are other #NoNATO livestreamers– the satirically named Gypsy Cell of #TOYM` (@Korgasm_ et al ; #TOYM) — still stuck in Chicago as the Police Department has impounded @Korgasm_‘s vehicle and is racking up charges per day that the present donation stream can’t get ahead of long enough so the funds clear and the journos can get the vehicle back. Apparently while the vehicle has been in impoundment, one of the license plates has been taken s.t. only two of the six screws that had been holding it place were left on the vehicle (yet another replacement cost). These types of difficult-to-estimate-in-advance expenses have zeroed them out so that now they need to again come up with the $400 for gas and some food for the ride back to Oakland plus the funds @Korgasm_ needs to get herself home after everyone else is taken care of. I would expect that any sincere assistance would be gratefully accepted!

  8. P J Evans says:

    Better to sell the entire country to China than do any of the things they’re officially supposed to be doing (and aren’t really)?
    If they want to rule over peasants, okay – but they won’t have power except on the paper they can’t afford to buy (and couldn’t read even if they could buy it, since education is going to be one of the first things to disappear).

  9. mzchief says:

    { Hmmm … The comment I was typing looks like it just disappeared into oblivion. Testing 1, 2, 3 … }

  10. mzchief says:

    @bmaz: Sorry, my bad. How about Trash Talk AND a road trip? Could be an EmptyWheel.Net family affair and more satisfying than NetRoots Nation.

  11. paul says:

    I’m with you on the cyber-security/hacking thing but…

    We don’t need to acquire dollars from China (or anyone else) by selling bonds. That is a choice written into our laws decades ago.

    China holds our dollars as savings, acquired by them voluntarily in exchange for stuff they sold us. That transaction put their people to work. Japan has been trading us Toyota’s and TV’s for 60 years and seem quite happy to continue for the foreseeable future.

    We don’t owe them a penny. As I said, we pay them interest on the dollars they hold but that is voluntary.

    A simple change in the law and the Treasury could print money directly without going through the bond sale ritual dance.

    Who bought the bonds during WWII when our National Debt™ went from ~$50 Billion to $260 Billion. That money literally did not exist so who did we borrow it from?

    The next debt-limit fiasco may well see the Treasury creating money directly, since the law requiring dollar-for-dollar exchange for bonds appears to be in conflict with the 14th Amendment.

    There’s no doubt it’s been done in the past, otherwise there would be no net savings on the USA balance sheet, and no money in the economy other than credit money, which is accompanied by an off-setting liability.

    We would be the Eurozone.

  12. emptywheel says:

    @paul: Thanks.

    I get that you’re right about printing money–that’s why I was very hesitant to suggest this was a way around the debt ceiling. But is there any reason why we’d be hiding this stuff like we are?

  13. paul says:

    “is there any reason why we’d be hiding this stuff like we are?”

    There’s always a reason. In this case there are several possibilities and combinations.

    TPTB want/need to be in control. TPTB right now are powers outside of government. It’s in their best interest that the rubes (us) don’t understand money.

    They create an alternate universe of borrowing /spending so that the public always thinks we are constrained by lack of money, like a household, when in fact we are constrained only by the limits of what we can produce and by extension, inflation if we try to consume more than we can produce.

    Right now we are consuming way less than we were producing just a few years ago.

    The National debt™ is nothing but an accounting record of money creation and by extension savings. Money is available at no cost in infinite quantities. Why would we borrow that which we can create at will?

    The idea that we have resources waiting to be used and labor sitting around out of work doing nothing is absurd in the extreme when you realize the only thing keeping them apart is little green pieces of paper or their equivalent, numbers in a spreadsheet – an electronic accounting record.

    People are sitting around unemployed/underemployed because private sector actors can’t figure out how to squeeze more out of us at a profit and have convinced most of us that government spending doesn’t count.

    In reality, private-sector economic growth could not happen without government spending because every private-sector process removes net money from the economy in the form of profit or accumulated wealth (savings). Accumulated wealth may as well be on the Moon as far as the economy is concerned.

    It would be a travesty if we cut entitlements one penny. We should be spending more, and people should be encouraged to retire earlier so that our young people can have a chance.

  14. Scarecrow says:

    @emptywheel: We “hide” this because most of the public has been conditioned to believe that the Chinese own us by holding our bonds, and it’s unpatriotic to borrow money from those commies. It’s all gibberish,but exactly the kind of gibberish that Congress wastes it’s time on.

  15. Schofield says:

    Republican and Democrat Party politicians and their supporters a bunch of Commies? May as well be!

  16. Dan Lynch says:

    Interest rates are determined by the Fed, not by China. The Fed buys and sells T-bills to maintain the price within its targeted range, so we don’t depend on China to keep our bond rates low.

    However . . . the powers that be don’t necessarily understand that. The Obama administration may buy into the popular misconception that China may stop buying our bonds and that the sky would fall.

    The kowtowing to China may be motivated by that misguided fear. I can’t think of any other explanation.

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