Frank Underwood Is Embarrassingly Ignorant About How Treasury Auctions Work

Business Insider
Analyzing the top news stories across the web
March 2 2014 6:37 AM

What Frank Underwood Doesn't Get About How Treasury Auctions Work

Kevin Spacey as Frank Underwood in House of Cards.
Kevin Spacey as Frank Underwood in House of Cards.

Courtesy of Netflix

This post originally appeared in Business Insider.

There is a lot of confusion surrounding China and its role as a holder of U.S. government debt.

An exchange at the beginning of episode 6 of the second season of House of Cards provides a perfect illustration of this. In the show, members of the presidential administration are discussing which tack to take with China, and the president suggests playing hardball.

Advertisement

"If China doesn't show at the refunding auction, long-term interest rates will spike!" warns someone at the table—ostensibly the treasury secretary.

"And in a week, yields on our 10-year notes will pierce the 7 percent threshold," chimes in Frank Underwood (the show's main character, portrayed by Kevin Spacey). "That could happen."

You've probably heard this before in American political discourse. There's this idea that if China decides to stop buying U.S. government bonds, the U.S. Treasury will have a failed auction and bond yields will surge. There are two big problems with this: First, there is a system of primary dealers in place to make sure that failed auctions won't happen, and second, China's holdings of U.S. Treasuries are not some sort of "leverage" that the Chinese government holds over the U.S. government.

On the contrary, China's Treasury holdings are a function of its foreign exchange reserve accumulation.
As other countries buy Chinese goods with dollars—the primary currency of international trade—it puts upward pressure on the Chinese renminbi. China's central bank accumulates dollar reserves to counter this upward pressure, and it holds those dollar reserves in U.S. Treasuries in order to garner interest.

China's foreign reserves continue to rise, so it is in no position to "dump U.S. debt," as politicians sometime like to claim it will. It is true that its central bank has begun to allocate away from Treasuries as a percentage of its reserve portfolio, but this is the sort of thing that must be done over time.

So when you hear politicians engaging in fear-mongering over China's holdings of U.S. government bonds, remember that it's complete nonsense.

TODAY IN SLATE

Politics

The Right to Run

If you can vote, you should be able to run for public office—any office.

Move Aside, Oxford Comma, the New Battle Is Over Single or Double Quotes

Renée Zellweger’s New Face Is Too Real

Sleater-Kinney Was Once America’s Best Rock Band

Can it be again?

Ben Bradlee’s Fascinating Relationship With JFK

Culturebox

The Simpsons World App Is Finally Here

I feel like a kid in some kind of store.

Technology

Driving in Circles

The autonomous Google car may never actually happen.

My Father Invented Social Networking at a Girls’ Reform School in the 1930s

How Punctual Are Germans?

  News & Politics
Politics
Oct. 22 2014 11:06 AM The Right to Run If you can vote, you should be able to run for public office—any office.
  Business
Moneybox
Oct. 21 2014 5:57 PM Soda and Fries Have Lost Their Charm for Both Consumers and Investors
  Life
The Vault
Oct. 22 2014 11:36 AM Casting the Role of Scarlett O'Hara Was Really, Really Frustrating
  Double X
The XX Factor
Oct. 22 2014 10:00 AM On the Internet, Men Are Called Names. Women Are Stalked and Sexually Harassed.
  Slate Plus
Working
Oct. 22 2014 6:00 AM Why It’s OK to Ask People What They Do David Plotz talks to two junior staffers about the lessons of Working.
  Arts
Behold
Oct. 22 2014 11:04 AM Do All U.S. Presidents Look the Same? What About Japan’s Prime Ministers?
  Technology
Technology
Oct. 22 2014 10:29 AM Apple TV Could Still Work Here’s how Apple can fix its living-room product.
  Health & Science
Science
Oct. 22 2014 11:30 AM Where Does Ebola Hide? My nerve-wracking research with shrieking bats.
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.