This talk about Europe’s ability to wield its holdings of US Treasuries as a political tool is as divorced from reality as the talk about China’s ability to wield its holdings of US Treasuries as a political tool. via @ft:

Treasuries could be Europe’s best defence for Greenland The region’s vast holdings of US government debt give it leverage with the Trump administration https://www.ft.com/content/7d64364f-467d-43a1-aece-c0e7b96a3315

For all the huffing and puffing, Chinese holdings of US assets actually increased. This shouldn’t have been a surprise. If you run massive trade surpluses, you have no choice but to acquire foreign assets, and if you won’t acquire the alternatives, you must buy US assets.

These analysts seem to forget that you cannot change your capital account without also changing your trade account, and that you cannot change your external imbalances without also changing your internal imbalances.

If Europe sells its holdings of US Treasuries, it must either replace them with other US assets, in which case nothing substantial will have changed, or it must replace them with assets of other countries, which mostly means risky developing-country assets (neither Japan nor China will accept the currency and trade-account impacts of massive net capital inflows), or it must tolerate a large and rising trade deficit, with all the implications these entail for domestic growth and domestic manufacturing. These are the only practical options.

As for the claim that the sale of US Treasuries will drive up US interest rates, this is one of those things that everyone says mainly because everyone else says it. It isn’t true. It really depends on the how foreign purchases of US assets affect the domestic US economy.

What matters is whether foreign capital inflows into the US drive up US investment, US unemployment, or US debt. If they drive up US investment, a net European sale of US assets will indeed harm the US economy, but this is unlikely to be the case.

Foreign Capital Inflows Don’t Lower U.S. Interest Rates Contrary to conventional thinking, net foreign capital inflows do not lower American interest rates (unless they do so by raising U.S. unemployment). A tax on foreign inflows is therefore unlikely to … https://carnegieendowment.org/china-financial-markets/2025/07/foreign-capital-inflows-dont-lower-us-interest-rates?lang=en

What constrains US investment is far less likely to be scarce saving than weak demand, which a European sale of US assets would actually help resolve by pushing down the value of the US dollar and thus making US manufacturing more globally competitive.

If foreign capital inflows drive up US unemployment, for example by causing less-competitive US factories to close, then a net European sale of US assets would indeed drive up US interest rates, but in a process that would entail faster US economic growth.

The most likely case is that foreign capital inflows drive up US debt (to prevent a rise in unemployment), in which case a net European sale of US assets would have little impact on US interest rates and would even allow the US to rebuild its manufacturing sector.

Some people might argue that if Europe was to sell off US Treasuries in a chaotic way, this could disrupt the US economy. That’s true, of course, but the resulting collapse in the US trade deficit would be even more disruptive for Europe and the world.

Trump’s desire to acquire Greenland may be pretty silly, but this doesn’t justify saying even sillier things in response. Selling US Treasuries that had been acquired as a way to resolve domestic imbalances cannot happen without recreating those massive imbalances.