A Nov. 10 insightful article by RT editor Henry Johnston describes the way that the all-important U.S. Treasury market is rapidly becoming dysfunctional, posing a grave risk to the entire international financial system. This is a story that EIR has been exposing over the course of 2023.
Carrying the headline “‘Terrorist’ Economy: Washington Is Prepared To Create a New Financial Disaster for the Whole World,” Johnston’s article begins by noting: “At the heart of this increasingly brittle and dysfunctional system is the U.S. Treasury market.” The author notes that up through 2014, the main purchaser of U.S. Treasury bonds were foreign central banks, but that since then they have stopped buying on a net basis. China, which has sharply reduced its holdings of Treasuries, is the major factor in that regard.
The large U.S. money market banks picked up the slack, building up huge portfolios of Treasuries. But when interest rates rose from effectively 0% to over 5% in the last year, this devalued their holdings dramatically, and “banks were sitting on large unrealized losses in their Treasury positions.”
So the Fed had to devise a new scheme to pump liquidity into the banks, both to bail them out but also to make sure they could keep buying Treasuries—which the U.S. government has been issuing as the federal deficit grows. Johnston explains:
