The $800 Billion "Margin Call" That Could Crash the Bond Market | Lyric Hughes-Hale
Summary
Taiwan Risk: Discussion centers on how Taiwan’s massive US Treasuries held largely by hedged life insurers could force rapid liquidation on invasion rumors, creating a bank-run style shock.
Financial Mechanics: A mismatch between USD-denominated assets and TWD liabilities, plus regulatory margin-call dynamics, could dump ~$800B Treasuries into markets within hours.
Comparative Holders: Unlike China or Japan’s sovereign holdings, Taiwan’s private insurer structure increases forced-selling risk and immediate market impact.
Policy Mitigation: Proposals include G7 coordination, pre-arranged emergency swap lines, and enhanced transparency via mark-to-market and joint Fed–Taiwan central bank reporting.
Market Triggers: Even credible threats, exercises, or accidents—not just invasion—could spike TWD, pressure Treasury prices, and propagate global financial contagion.
Semiconductors: Taiwan’s chip leadership and TSMC (TSM) U.S. fab plans are framed as strategic deterrence and diplomacy, with R&D talent largely remaining in Taiwan.
Information Risks: Rising AI deepfakes and disinformation may amplify panic signals, complicating crisis detection and response.
Overall Outlook: Taiwan’s financial heft is underappreciated; proactive planning and transparency can reduce a potential black swan while insurer demand for Treasuries likely persists.
Transcript
Basically we're saying even before a single missile or shot at to Taiwan, the market will already react. The first reaction within Taiwan will be, oh, I, I'm gonna want my money back. The money they have is in US bonds. They are required by law to liquidate. It's 800 or so billion dollars worth of US treasuries. Hitting the market in the span of hours and not with malice aforethought. What if I told you that one of the biggest risks to the global financial system was not the US housing market, not an AI stock market bubble? Not even China's massive US Treasury holdings, but instead the friendly island of Taiwan. Our ally Taiwan owns nearly as many US treasuries as China. But how they own them and what could force them to sell all at once poses a massive risk to the global financial system. That's the story uncovered by Lyric Hughes Hail and Eric Huang of EconVue. Lyric is the editor in chief at EconVue, and Eric is a Taiwan based geopolitical analyst and former deputy representative to the US for Taiwan's KMT Party. Today they join me to discuss why Taiwan's Treasury Holdings could, in a matter of hours, trigger a global financial crisis and what can be done to avoid it. I'm Ed D'Agostino and this is Global Macro update. Eric Huang and Lyric Hail. Eric joining us from, from Taiwan and Lyric in Chicago. It's great to be with you both. You wrote a fascinating article, joint article about Taiwan's role in the US bond market, which sounds boring, but as as I got into it, I, I just, I was mesmerized. This is a risk, a huge risk to the US Bond market that I had. No idea existed, nor did I know Taiwan even played such a big role. So that's the topic of our, of our discussion today. But before we get there, uh, given the events that happened in Venezuela over the past weekend, I'd love to just get short of your, your thoughts, Eric. What has changed? Has this event changed the narrative around Taiwan from China's perspective? Well, I think, I think it's a little. Early to tell, um, as we all very familiar with China, it, it just, it it's a Tinder box. You never know what they think or how they think or how they come to decision making, their process and this and that. Right. But what I, what I will share is this, the, the, the, the current domestic discussion in Taiwan, right? Um, on one end, um, the government, the current government, the DPP, the, the Democratic Progressive Party. They are arguing that US has the might to take out any of its enemy around the world. And they're saying that the Chinese should be very wary once they see what's happening, the event that has taken place, that A, the US has the willingness to stop his enemy at no end. And B, he has the military right to do so. On the contrary. The opposition party, the KMT, the ton, the experts and ponders are arguing that, um, China might very well do the same to a pro independent president in Taiwan. So basically two sides are just arguing across one another. Um, I think the answer, um, quite frequently is probably somewhere in the middle. Um, I think both, both sides are taking this a little too much into their own narrative. Um, I think, uh, the core, core issue at hand here is whether or not Taiwan is in US interests. Is it an, uh, extreme important interest or is it vital interest? I think this is why we're sitting here today. And talking about, uh, Taiwan holding so much US bonds and what that might means for us policy makers and average Americans. If you look at foreign holdings of, of US government bonds, Japan is number one. They hold the most, generally considered a, a very strong ally. Next in line is China. You have lots of talking heads in the US talking about how this, this is something that they could weaponize against the US and we'll get into why that's perhaps not the case. And Lyric, I think made a, a very eloquent argument as to why that doesn't really make sense. A close number three, in terms of foreign holders of of US treasuries is Taiwan almost exactly the same amount as China. I had, I had no idea. And we'll get into why that's a risk because of the way that they hold them. Uh, but, but, but first let's talk about why they hold so many. So Lyric, uh, I'm gonna try hard to, to not lose everyone because this we can get Right. Getting into the weeds. Yeah, exactly. But why, why does, why are there so many US treasuries held? In various entities in Taiwan. Well, part of it is to hedge against securities. And recently, you know, Eric shared with me an article, a letter from the Central Bank of Taiwan to the New York Times, and they brought up a new issue that we did not, I think cover sufficiently in our article saying that, um. One of the reasons that the, um, insurers hold so many US bonds is that the, their own central bank doesn't issue enough bonds themselves. So, and they do that for, they said in this, in this letter for fiscal reasons. In other words, they don't wanna expand their balance sheet like we have done in the United States. We can do that because we are the reserve. Currency of the world. We have that exorbitant privilege to raise debt above all other countries. Perhaps Taiwan doesn't feel that they have that same ability to issue bonds within their own country. So that's another reason that, for example, insurers. In Taiwan who are, have, have very large asset holdings, they, their, um, you know, their cashflow is today, but their liabilities go on for decades. That's the nature of insurance, right? So it, they are trying to hedge, they're trying to make sure that they have enough. Money to meet those obligations over time. One way that they have done that is by buying US treasuries. So Eric, am I characterizing that correctly? It's like a combination of hedging against currency issues and trying to make the search for yield simply is the reason that they're doing it. And Eric, just to back up even one step further, who owns the treasuries in Taiwan? In large part insurance companies. Yes. Um, a lot of these are, um, insurance companies, insure life insurance companies among others. Um, so I'll, I'll add two more points to what Eric already described. Right. Which I think is quite comprehensive and cover most of the, but if you put into historical context, um, the trauma of 1997. Where Taiwan Central Bank was hunted by, uh, other Asian financial crisis, where, um, they are in fear, um, of lacking US dollars. Where, um, you have, um, people like source just, you know, basically, um, single handedly make country like Thailand or Korea. Currency fell flat. Right. So, uh, we have described the phenomenon today is a culture of us, right? Where government encourage life insurers to take up excessive saving and invest in us, uh, bonds effectively, right? That's number one. Um, another issue is that Taiwan is entering an aging society where, um. Taiwan is heavily influenced by Chinese culture where, um, before you retire, you save, um, a large amount of money. So, uh, you can guarantee a life standard and you wouldn't have to worry your kids, uh, for your life after you retire. So because of that, uh, because the saving and this 1997 trauma. And then you, the, the Taiwan government encouraging buying US dollars. This also, um, uh, flows to another point where, uh, Taiwan historically has been very conservative for is physical and economic policy, um, because they're in fear of national security. Uh, when you mentioned Japan being a number one US fund holder. But they're not in constant fear of another country attacking it or blockading it. But Taiwan is so Taiwan, um, is especially, um, dangerous in that perspective. And so, uh, holding US dollars and having insurers holding US dollars, giving us. Another layer of, uh, systematic risk. Back to your question at who holds them right. So, um, uh, private, uh, individuals hold us treasuries in Taiwan, for example, but the danger of the insurance companies is that they hedge their holdings, their privately. So the holdings of China, for example, in Japan, are held by their, a combination of sovereign funds. The government, they have more abil, they have more of an ability to not do something very quickly. Whereas if you're hedged and you're a private holder, that's the real danger. That's what we, I think, uncovered in this article, is that they will be forced into liquidation instantaneously. Even if there's even the whisper of an impending invasion of Taiwan by China, that's the key vulnerability. So it, it's not the same as ch uh, the Taiwan's holdings in the composition of tho those holdings. A, the same as, uh, uh, China's or Japan's, they're just as large as China's. But they're uniquely vulnerable. What would trigger something like that when, when you say that? A, a, a Taiwanese life insurance company that holds a lot of us treasuries is hedged a lot of, we're gonna lose a lot of people right there. Maybe we could talk about the mechanics. Not, not, not to go into too much detail, but just sort of why they hedge and, and more importantly. What does it mean? What would force them to sell? 'cause that really, I think, gets at the core of, of, of what's happening here. I think, Eric, if you can describe that process, how they're thinking there in terms of what they would have to do if suddenly there was a change in rates and exchange rates. For example, if it, the exchange rate pressure happened if years, uh. Uh, if you're the treasurer of this, of an insurance company in Taiwan, what do you do? What happens automatically? Right. So basically the mechanism of, um, what we might call a margin call is when, uh, by law these insurers have to liquidate. Uh, they're found that their, the money, if the, the, the people insurer, the insurers wants their money back. Right. So, um, if say there is a political event or if the do Taiwanese dollar are either appreciating or depreciating too much if they want their money back, right? Um, the insurance company by law have to sell the US bonds and bring the money back home. This is when we believe, um, will cost some problems to US dollars, right? Um, this event can also be triggered. By any, um, political crisis, right? Uh, we hear a lot of people talk about, um, contingencies in Taiwan, uh, being a military, one being having missiles shooting at Taiwan. People talk about, uh, the Silicon Shield where Taiwan semi doctors can protect Taiwan. I think Lyric and I had this idea, we wrote this article because not enough is being discussed about this financial and what this will happen. Basically we're saying even before a single missile or a single, um, battleship either blockading in Taiwan, St Trade or shot at to Taiwan, um, the market will already react. You will see if somebody whisper about, oh, uh, the Chinese might want to invade, or they're thinking about planning about invading, or they, they have thoughts about something, or Xi Jinping said something, the first reaction within Taiwan will be, oh, I, I'm gonna want my money back. I'm gonna call my insurance companies. Say, oh, I want, I want to take my money back. And the money they have insured, the money they have is in US bonds. Um, they're required by law to liquidate, and the United States is a democratic country By law. If, if Taiwanese insurer wants to sell, they have every right to do so and you cannot stop them. And this is what we're, describe it, the phenomenon here. So, uh, contrary, uh, to what many people believe, um, when this happens, um. When insurers have liabilities in Taiwanese dollars and they hold their asset in US dollars, um, then they're gonna swap right this when they want to hit this currency risk. Right? Um, the Taiwanese investors, um, will want. Taiwanese dollars back domestically, not that they wanna hold onto domi, uh, Taiwanese dollars longer. They want these money back home first. So, um, they have the liquid liquidation, right? So what might happen is Taiwanese dollar might appreciate sharply against US dollar, um, and the US asset might drop, drop in. Um, its in currency outright and in Taiwanese dollar terms, it would affect US treasuries. The price immediately. It sounds like it's, it's, it's the equivalent of what we would call a bank run. Not too dissimilar to what happened at Silicon Valley Bank. A bunch of depositors got panicked, uh, concerned about the bank and pulled their money, and that forced liquidations and it blew up the bank. But in this case, if there's. If there's, a's the much bigger bank. Yeah. I mean the, the than Silicon Valley. Yeah. Yeah. Mm-hmm. It's, it's, it's, it's, it's 800 or so billion dollars worth of US treasuries hitting the market in the span of hours. And not with malice, the forethought, you know, that everybody's worried about the Chinese dumping their treasuries, but they don't have any incentive to do that. That would, because then the value of their treasury, of their holdings would plummet. So why would you do that? All of a sudden, they don't need to do it because it's the government. They don't have the pressure of individual citizens. Demanding liquidation, as Eric just described, and that what could happen in Taiwan if China dumps their treasury. That's the important part. One of the important parts of this, of this important article was you said, if, if China decides to, to weaponize their, their treasury holdings, like so many fear, they're really shooting themselves in the foot. 'cause it, it comes at a huge cost. They will, they will collapse the value. Enormous cost to them. Billions and billions of dollars in hard currency. So I think that, that it's unlikely to happen. Uh, on the other hand, you can see that China has been getting rid of its treasuries over time. They have been offloading it, but they don't do it all of a sudden for the reasons that we just said. Right? It's not logical to do that. I have a picture in my mind of almost like a circular firing squad here. Right, exactly. Everybody's got guns pointed at each other. And Taiwan's in an interesting position, I mean e Eric, how do you, how do you think about that? I mean, if, if, uh, you, you've got a, you've got a, uh, an adv, an adversary, uh, very short span of water away that, uh, would, would like to see reunification. Um, and, and everyone sort of assumes that. Chips are, are the driver for all this geopolitical interest and action around Taiwan. But is it, is it chips or is, I mean, China would be shooting themselves in the foot if they invaded financially. Uh, in a way that I had never heard anyone talk about, but that I agree. People don't understand the mismatch between the, as Eric just said. I think it's really important to underscore that the mismatch between the assets and the liabilities. The assets in terms of Taiwanese dollars and the liabilities are in US dollars. So when there's a liquidation event, there is obviously a crisis that could occur. But the US Treasury has recently recognized this actually, and they have started to, there, there are discussions that are taking place that, uh, you know, Eric wrote about in the article. As well. And senior, I think senior Taiwanese officials are aware of this, this risk as well. So what can be done about it? Right? That's the key question. What can you do to mitigate the risk, Eric? See from me sitting in the US this sounds like a risk. You sitting in Taiwan, is it a chip? I mean, is it, is it, is it in some ways an asset? No. Many things cut both ways or many ways, right? Uh, you know, to answer your earlier question. Um, a different person sitting in the White House might think differently about how to handle the Taiwan issue or, or US China relations in great power competition perspective. Um, I, I, I am apolitical in US politics. I'm, I'm a trained diplomat. I don't take sides in US politics, but I think President Trump has done somewhat a very good job handling this situation, a very dedicated situation. Um, I think, um, a, he has somewhat de-risk, uh, the military, um, high tension between US and China, which is obviously good news for Taiwan. Um, I think b um, he has highlight, um, some of the, um, economic, um, activities that the US are trying to do to strengthen its own economy and manufacture capabilities. Um, I think here in Taiwan, um, it's not just about, um, semiconductors. Um, I think it's also about, um, how Taiwan can be, um, a closer ally even though we don't call Taiwan an ally, uh, from diplomatic terms. But how do we see Taiwan as a good friend, a US friend, we can invest in the US and how we can put our trust in the US. I think that shows us, um, Taiwan's not only a democratic friend, but it's somebody who trust the US and invest in the US that obviously straightened, uh, US Taiwan cooperation and relationship. So is that a deterrence? Is think, um, in many layers, uh, in many, um, indirect ways? The answer is yes. But obviously Taiwanese people don't think, um, buying us bonds as a deterrence. Um, uh, deterrence has to go through, um, military and economic and diplomatic, right? So there are three pillars here. Um, I think Taiwan is do everything to show our determination, to defend ourselves and not to star war. With Beijing. I think Ed, your point that, you know, perhaps having the chips, um, uh, manufactured in Taiwan, that Chi China would be careful about disrupting that flow, but also that this is another deterrent. That's a very interesting way of looking at it. Per, perhaps there's a, and I imagine that in at the People's Bank of China, they realize this as well. I can't imagine that they don't know that what would happen in Taiwan if an invasion were about to occur. You know, when this happened with, when Putin invaded Ukraine, the, the risk to the fight global financial system was minimal because we already were not doing a lot of business with Russia, but in this case, we're doing. Vital business with Taiwan, and if they invade and the Taiwanese dollar spikes higher because people say panic and say, gimme my money back, which is a rational response, uh, China inadvertently takes a huge financial hit. Right. It's very interesting. Yeah. It is. As you say, it's a circular firing squad. We all hope none of this ever happens. Absolutely. So, so, so you touched on lyric what can be done. To solve this issue or mitigate this issue to some extent, and that there are people on all sides talking about steps that can be done. What, what are some of the things that are being done to, to potentially make this less of a risk? What really need needs to happen is that you have to have, you know, an uh, an emergency swap. In place that should be negotiated and and put in place. And also I think in what we recommend in the article is that the G seven should get together and create a, a committee. Some sort of group that should something like this occur that they look at all these scenarios and that they have a plan to act together. During the global financial crisis, what really prevented the worst from happening was the coordination amongst the G seven central banks. But I'm not sure right now if they're aware of the risk. I think they are in Beijing. I think they are in Taipei. I'm not sure, probably in Tokyo, but I'm not sure that they're aware in the rest of the world that there's a discussion going on. I haven't seen much evidence of about it. Most of the discussion, as in the Economist article revolves around this idea, is the, the, the Taiwanese dollar overvalued. Undervalued, it's around currency. It's not taking a look, a deeper look at Taiwan's, uh, incredible, uh, treasury holdings. I think as I mentioned too, you know, we still have a picture of Taiwan as this very small player. We're beginning to understand the importance of Taiwan because of semiconductors, but our picture of their financial. Um, heft is really back in the days of Jimmy Carter, when the agreement about Taiwan was made between the US and China. Taiwan only had 10 or $20 billion in foreign reserve. That was it. Now look at it. The situation has radically changed, but recognition of Taiwan's important place in the global financial system has not yet been recognized. Eric, anything to add on that? I think likely this trend, um, will continue, um, that, that high either citizens or insure insurance companies will continue to buy US bonds. That's not gonna stop. Um, what is interesting in it, um, Derek and I are actually thinking about writing a sequel. Part two of this, um, is because, um, starting this month, this year, January 1st, 2026, um, by law Taiwan Taiwanese insurers must, um, um, reveal a mark to market their bond portfolio. This is a mechanism where, where ensure transparency and will make them reveal exactly how much of the duration risk they're carrying. So this, um, on top of the, um, November 14th joint statement between Taiwan's Central Bank and the Federal Reserve for, uh, where they have to re report. Quarterly on the intervention of any risk, uh, they might be facing. Right? So, um, we call this, um, the new era of transparency. So, um, once the structure transformation is in place in Taiwan's Finance system, financial system, even though the theoretical risk might still be, uh, visible, but I think, um. Investors will somehow have even a boosted confidence. So for, um, this trend to continue, uh, this is definitely something, uh, for us po uh, policy makers to think about. Silicon Valley Bank, uh, really got caught in the crosshairs of marketing to market their bond portfolio. That is what doomed them. So if they had been allowed to just have the, continue those holdings, it was the mark to market. Event that caused the failure of that bank. So I would be kind of worried about the transparency, even though I think long term it's a good thing. Um, there could be some surprises as those reports come in. This is one of those situations in that comes up in finance and economics once in a while where individual actors, whether it be households or. Banks or corporations, they all act in rational ways. They, they do things that are perfectly rational and make good sense and are good decisions for them at an individual level. And then when you aggregate, you find that there's this colossal risk that. Nobody really saw until like mbs Until you EE, exactly, exactly. It's, it's very similar to that. As those risks got concentrated in that, those new financial instruments, that's what created the, the problem, it's rational for someone to try to buy a home. Right at the lowest cost they possibly can, and for the banks to do as much of that business and the mortgage brokers as possible. Those are all rational things. But the con, it's the concentration at you're exactly. That's what, that's what we're trying to bring attention to here. It's the concentration of risk. You know, at Econ view, we think it's our job to try to bring these under-reported stories and risks that people should be thinking about that they haven't yet considered. This could have been the classic definition of a Black swan event. Something if something played out. So your illumination on this and, and Eric's suggestion of transparency, of current value, while it poses risks, I think it. It makes the job of that G seven committee that you're, that you're, uh, suggesting be formed, it makes their job 50% easier because they'll at least know what the heck is going on if, uh, if a crisis starts to hit. Right. You know, another thing I thought of, just as you know, thinking from a perspective by highlighting this risk, are we indeed creating more risk? In other words, people not knowing about it. You know, it's kind of like the Von Heisenberg uncertainty principle too. As you measure something, you have a, there's an impact that you have. And how do you not have that by showing what's going on? Um, I think in the end you have to come out as, as Eric said, you have to come out on the side of transparency. That's what makes our market so strong. That's what makes what's going on in China now so difficult. Their economy is suffering from the lack of transparency and the lack of information, the lack of data being shared, and I think it's a critical problem. So the truth always, it comes out anyway sooner or later. So I think it's. I'd have to say we came out in favor of disclosing this information so that people could make other plans and that something like the G seven, hopefully people can take more, um, action. But the US Treasury Department and Scott Bein, I think has a very good grasp of this, which is good. And it's obviously that the, the Taiwanese officials do too. I'll add another layer This. So in Taiwan, even though, um, all these insurer or financial institutions are, um, public traded companies, but they're essentially owned by just couple families, um, maybe a handful of companies owns all of them and they come control of them, all of them very firmly. I think that adds another layer of risk, uh, whereas they don't have a real strong. Shareholders, um, where families can make decisions, might only interest their own, uh, benefit. Um, this potentially can be something on top of a very rigid old school, uh, regulation. Financial regulation, even though a timely government are talking about loosening the regulation and making it more, um. 21st century. Um, we don't know when that might happen. So basically you're looking at Taiwan, where, um, this semiconductor is running very well on a very fast engine, but, um, the financial is very old school, uh, and very outdated. Going back to the geopolitical risk, it does not take an invasion of Taiwan for this to happen. It just takes a credible threat of an invasion. It takes potentially just a strong rumor. For this to, to begin, and I don't know how quickly it could be reversed. Have there been any false starts to this? 'cause you lay out in your econ view article, you both lay out the timeline of, of what a crisis could look like. And I think that was from a a, from from a US government, uh, age. Was that from the BIS or? Oh, we just came up with that. Oh, okay. That's just a scenario planning. Thing, but yeah, it was quick. Yeah, it's fast. It's hours. It's minutes. It's not days. I think it was two weeks ago, uh, China was doing one of their practice exercises where they, uh, if I read the article correctly, they ring, ring fenced, uh, Taiwan, um, with ships and aircraft. I mean, how, how, how does the market sniff out? What is. What is a real risk and what is just sort of. Political posturing and gamesmanship with the addition of the Japanese new, the new position by the new Prime Minister of Japan, Takai. That's another, uh, element of this, but yeah, Eric, that's a, you know, I wondered that too, how. When would someone in Taiwan people are, you know, probably more skeptical in Taiwan about the reality of something happening? Are they becoming less skeptical? What would be a trigger for these, for this to start happening for people in Taiwan to say, yeah, this is really, this game is on the past 20 years, every four years. Um, in Taiwan, we, every four years we have a presidential election. So every four year cycle, you, you often hear politicians say. This is the most important election of your lifetime if you don't vote. But I've never heard that before. Exactly. Now I think of it, maybe that's even an understandment, maybe 30 years. Right. So I, I think Taiwanese people are just so used to hearing these type of things. And even if you look at the, the, um, the, the, the, the, the military exercise, PLA exercise that Ed just mentioned, what they, um, call the justice mission 2025. If you look at military like pound, pound to pound, pound by pound is, is actually. Very dangerous. Um, you know, they're, they're circling around Taiwan. Um, and you can be just short of World War III if the US decide to incubate. Um, but I think what might actually take for Taiwan needs to panic as the question is just to one of these big families that owns these financial institutions. People, you know, swift wind of, you know, rich people getting their money out or they're making some type of thing and the market can just panic in seconds or maybe one of these days. Um, if somehow Taiwanese belief the US has a new policy where, um, they no longer want to defend Taiwan, maybe the whole sentiment will change overnight. Uh, this is a very dedicated issue. Even though Taiwanese people have the thick skin today, doesn't mean that sick skin, skin will always carry. So I think a number of issues, my, um, and this, this things is something I, I, I hate to say is hard to predict. Um, I will say anything might trigger the event. Anything big or small? Uh, it's just hard to say to me. With the increased military operations, and I don't know if you've seen on social media, China, uh, uh, Taiwanese social media, I saw the conversation between a Taiwanese pilot and, um, a, uh, a People's Liberation Army pilot, and they were taunting each other actually. And so I thought, boy, this is really dangerous behavior if it's, this is not an AI simulation, that this conversation is real. But when you have that level of operations, um, some, an accident could, that would be my concern is an accident happens and there's loss of life. Yeah. On both sides and the US gets involved and then we're off to the races. Yeah. A plane or a helicopter, uh, collision, uh, that lands on the mainland, uh, or, you know, or, or lands on the island. Think about it. Yeah. Like a U2 kind of thing. Uh, uh, if you go back that far, I think that's, to me the clearest. Um, that's where everything could come home to roost and I don't know if the US. And China have a hotline to deal with that, or they have effective communications with counterparts, especially given the fact of all of the changes in the Chinese military recently, all the leadership changes. Is there a clear line of not just in, I think there's a clear line of command in the US obviously, and we're working very effectively. Whether you agree with it or not, between the executives, uh, between the administration and the military. But in China is the same thing. True. I'm less convinced of that. Do we have on the US side any relationships with the folks in the Chinese military to be able to, with their fingers on the button trust? Yeah, exactly right. Yeah. So that concerns me. You sort of casually mentioned, uh, AI. Um, but, but I, I mean, I actually think I, I'm just, in the past week, I've been shown, people have been sent really smart, successful business people who've made a lot of money, have sent me links to videos on YouTube that are deep fakes that they're, and they're asking me. What do you think? Is this real, um, wow. The role of disinformation? Yes. I mean, it's getting to point to be critical point where it's almost impossible to tell. Um, and I mean, one of them had me sitting in front of, uh, my laptop Googling at 10 o'clock at night because I, I wasn't a hundred percent sure. So I, you know, yet another thing that goes well beyond this discussion, but yet another challenge that, uh, geopolitics has to face in there could be a, you know, like war the worlds with Orson Wells. Mm-hmm. Right. You know, where people really thought we were being invaded. Exactly. That did happen, and that was way before AI that was on radio, but a famous example where a panic could be falsely, um, falsely incited. I just thought a very good example to share with, uh, all of our audience how Taiwan might feel about an invasion and what might, what, how one event might actually trigger that panic. Just about a month ago, um, there was a video air online basically claiming, um, that a PLA drone has flung over to Taiwan to capture pictures of Taipei 1 0 1 Taiwan's landmark building. So the argument is really that can a POA drone really flew all the way into Taiwan and capture the video. If you think about, uh, the reactions on Taiwanese people had is A, they thought it was the AI think, um, and BI think most people reacted is quite accurately that it might very well be a PLA drone, but there's no way you flew all over into Taiwan's airspace. So the most likely scenario is, um, a. A operative who currently lives in Taiwan who hasn't been cut, put on a drone and just basically video that that thing and tried to decimate fear into Taiwan. But I thought it was very interesting how Taiwanese people reacted so calmly that most people just straight up calling it AI fake. Um, I don't know honestly if that is good or bad. Um, I think many things depends. It cuts both ways. But you know, this just an example of how Taiwanese react to these type of daily events. So that is to say a military hot war might not be happening right now, but grave zone warfare between Taiwan and China is actually happening every day. Eric, I, I can't resist asking you, since you're sitting in, in Taiwan, what is the general thinking about TSMC? Building a facility in the United States, um, from Taiwan's perspective, I mean, 'cause I, I think that from the US perspective, it's, it's a move to de-risk, right? We wanna get T SMCs, uh, incredible deep knowledge in, in, in fabs and chip production. We wanna get that onto our, uh, our, our shores. We want to get their, their knowledge, um, transferred here. What, what does that mean for us support of Taiwan, uh, after that happens? Is there, it, does it deepen the support? Does it lessen the support or is it just, just how things are going to be and you can't stop it? Well, the argument always goes both ways, right? I, I, I would simply lay out both arguments and I, I will con cool with my own job. Right. One side of the argument is that if Taiwan's, um, so-called technology has been hollowed out and, and moved to the us, Taiwan will no longer of be of value, right? That's one argument. Of course, the counter to that is that A, um, most of the r and d that TSMC do remains in Taiwan. So we look at chips, right? They, every year they advance, right? So you cannot just simply have a fab move to Arizona, but you have to, um, every year have r and d done and upgraded, right? The r and d is still in Taiwan, and that's mostly, um, um, talented people, right? Brain power. And second, on top of that, when you talk about, uh, Taiwanese moving up fast to Arizona, um, I, I, I, um, don't want to offend anybody, but I, I assume a lot of people who lives in Arizona otherwise would never heard of Taiwan and would never even meet a Taiwanese if they never choose to travel to our island, right? So. In a way that's very good diplomacy and people read about Taiwan and t right? So both arguments are legitimate and it depends how you look at it personally. Um, a I think at your, your a hundred percent correct, there wasn't really a choice between Taiwan. It was a national security, uh, consideration that we want to strengthen and cooperate with our, um, with our security guarantor in the United States. I, I personally believe, and I'm very confident that TSMC going to Arizona or elsewhere around the world will help Taiwan, um, build our relationship and, and through that make Taiwan a, uh, peaceful member of an international community. Therefore, uh, will help us defend ourself and in itself it could be a deterrence. I think that's a very interesting point. About, you know, creating these greenfield investments in the us. Um, you know, we, uh, uh, probably some of your, um, viewers don't remember, but we once had a very, um, uh, difficult trade, uh, relationship with Japan. We had a trade war with Japan, and the way that was resolved was that Japanese automakers in particular started to produce. In the United States, and I worked with some of them in the auto parts manufacturers, but that was clearly a great idea. And the Perce and then, you know, the local Honda factory in Georgia then sponsored the little league team. You know, it was seen as a giver of jobs and as a, a member of the community rather than as, um, uh, a threat to the us. So, uh, yeah, so I, I think it's a similar model to that, Eric. I think, yeah, this kind of investment here and certainly with this administration, there's a huge push to do this. I guess the question is, if Taiwan does this, will the US actually, um, um, is, uh. Create more security for Taiwan itself. That is the question one that we can't answer today because it's very late for Eric sitting in Taiwan, uh, past his bedtime. I, I, I really, really appreciate both of you joining me. The article that you wrote, which is posted on Econ view, which is econ VUE. Com. Right. Thank you. Thank you. And, and also on Substack, I mean, it's a, it's a must read. We only scratch the surface of this topic here. Uh, can't recommend that article and the work that you do, lyric and Eric ov you can't recommend it enough. Thank you both so much for taking the time. This was fun, ed. As as always, take care. Happy New Year to everyone. Happy New Year. Happy New Year. I've got some great guests lined up over the next several weeks, including Liz Ann Sonders, George Friedman, Lacey Hunt, Louis Gave, and Marco Papic. So be sure to subscribe so you don't miss any of these conversations. And be sure to check out Lyric and Eric's work at EconVue. There's a link in the description below. Thanks for watching.
The $800 Billion "Margin Call" That Could Crash the Bond Market | Lyric Hughes-Hale
Summary
Transcript
Basically we're saying even before a single missile or shot at to Taiwan, the market will already react. The first reaction within Taiwan will be, oh, I, I'm gonna want my money back. The money they have is in US bonds. They are required by law to liquidate. It's 800 or so billion dollars worth of US treasuries. Hitting the market in the span of hours and not with malice aforethought. What if I told you that one of the biggest risks to the global financial system was not the US housing market, not an AI stock market bubble? Not even China's massive US Treasury holdings, but instead the friendly island of Taiwan. Our ally Taiwan owns nearly as many US treasuries as China. But how they own them and what could force them to sell all at once poses a massive risk to the global financial system. That's the story uncovered by Lyric Hughes Hail and Eric Huang of EconVue. Lyric is the editor in chief at EconVue, and Eric is a Taiwan based geopolitical analyst and former deputy representative to the US for Taiwan's KMT Party. Today they join me to discuss why Taiwan's Treasury Holdings could, in a matter of hours, trigger a global financial crisis and what can be done to avoid it. I'm Ed D'Agostino and this is Global Macro update. Eric Huang and Lyric Hail. Eric joining us from, from Taiwan and Lyric in Chicago. It's great to be with you both. You wrote a fascinating article, joint article about Taiwan's role in the US bond market, which sounds boring, but as as I got into it, I, I just, I was mesmerized. This is a risk, a huge risk to the US Bond market that I had. No idea existed, nor did I know Taiwan even played such a big role. So that's the topic of our, of our discussion today. But before we get there, uh, given the events that happened in Venezuela over the past weekend, I'd love to just get short of your, your thoughts, Eric. What has changed? Has this event changed the narrative around Taiwan from China's perspective? Well, I think, I think it's a little. Early to tell, um, as we all very familiar with China, it, it just, it it's a Tinder box. You never know what they think or how they think or how they come to decision making, their process and this and that. Right. But what I, what I will share is this, the, the, the, the current domestic discussion in Taiwan, right? Um, on one end, um, the government, the current government, the DPP, the, the Democratic Progressive Party. They are arguing that US has the might to take out any of its enemy around the world. And they're saying that the Chinese should be very wary once they see what's happening, the event that has taken place, that A, the US has the willingness to stop his enemy at no end. And B, he has the military right to do so. On the contrary. The opposition party, the KMT, the ton, the experts and ponders are arguing that, um, China might very well do the same to a pro independent president in Taiwan. So basically two sides are just arguing across one another. Um, I think the answer, um, quite frequently is probably somewhere in the middle. Um, I think both, both sides are taking this a little too much into their own narrative. Um, I think, uh, the core, core issue at hand here is whether or not Taiwan is in US interests. Is it an, uh, extreme important interest or is it vital interest? I think this is why we're sitting here today. And talking about, uh, Taiwan holding so much US bonds and what that might means for us policy makers and average Americans. If you look at foreign holdings of, of US government bonds, Japan is number one. They hold the most, generally considered a, a very strong ally. Next in line is China. You have lots of talking heads in the US talking about how this, this is something that they could weaponize against the US and we'll get into why that's perhaps not the case. And Lyric, I think made a, a very eloquent argument as to why that doesn't really make sense. A close number three, in terms of foreign holders of of US treasuries is Taiwan almost exactly the same amount as China. I had, I had no idea. And we'll get into why that's a risk because of the way that they hold them. Uh, but, but, but first let's talk about why they hold so many. So Lyric, uh, I'm gonna try hard to, to not lose everyone because this we can get Right. Getting into the weeds. Yeah, exactly. But why, why does, why are there so many US treasuries held? In various entities in Taiwan. Well, part of it is to hedge against securities. And recently, you know, Eric shared with me an article, a letter from the Central Bank of Taiwan to the New York Times, and they brought up a new issue that we did not, I think cover sufficiently in our article saying that, um. One of the reasons that the, um, insurers hold so many US bonds is that the, their own central bank doesn't issue enough bonds themselves. So, and they do that for, they said in this, in this letter for fiscal reasons. In other words, they don't wanna expand their balance sheet like we have done in the United States. We can do that because we are the reserve. Currency of the world. We have that exorbitant privilege to raise debt above all other countries. Perhaps Taiwan doesn't feel that they have that same ability to issue bonds within their own country. So that's another reason that, for example, insurers. In Taiwan who are, have, have very large asset holdings, they, their, um, you know, their cashflow is today, but their liabilities go on for decades. That's the nature of insurance, right? So it, they are trying to hedge, they're trying to make sure that they have enough. Money to meet those obligations over time. One way that they have done that is by buying US treasuries. So Eric, am I characterizing that correctly? It's like a combination of hedging against currency issues and trying to make the search for yield simply is the reason that they're doing it. And Eric, just to back up even one step further, who owns the treasuries in Taiwan? In large part insurance companies. Yes. Um, a lot of these are, um, insurance companies, insure life insurance companies among others. Um, so I'll, I'll add two more points to what Eric already described. Right. Which I think is quite comprehensive and cover most of the, but if you put into historical context, um, the trauma of 1997. Where Taiwan Central Bank was hunted by, uh, other Asian financial crisis, where, um, they are in fear, um, of lacking US dollars. Where, um, you have, um, people like source just, you know, basically, um, single handedly make country like Thailand or Korea. Currency fell flat. Right. So, uh, we have described the phenomenon today is a culture of us, right? Where government encourage life insurers to take up excessive saving and invest in us, uh, bonds effectively, right? That's number one. Um, another issue is that Taiwan is entering an aging society where, um. Taiwan is heavily influenced by Chinese culture where, um, before you retire, you save, um, a large amount of money. So, uh, you can guarantee a life standard and you wouldn't have to worry your kids, uh, for your life after you retire. So because of that, uh, because the saving and this 1997 trauma. And then you, the, the Taiwan government encouraging buying US dollars. This also, um, uh, flows to another point where, uh, Taiwan historically has been very conservative for is physical and economic policy, um, because they're in fear of national security. Uh, when you mentioned Japan being a number one US fund holder. But they're not in constant fear of another country attacking it or blockading it. But Taiwan is so Taiwan, um, is especially, um, dangerous in that perspective. And so, uh, holding US dollars and having insurers holding US dollars, giving us. Another layer of, uh, systematic risk. Back to your question at who holds them right. So, um, uh, private, uh, individuals hold us treasuries in Taiwan, for example, but the danger of the insurance companies is that they hedge their holdings, their privately. So the holdings of China, for example, in Japan, are held by their, a combination of sovereign funds. The government, they have more abil, they have more of an ability to not do something very quickly. Whereas if you're hedged and you're a private holder, that's the real danger. That's what we, I think, uncovered in this article, is that they will be forced into liquidation instantaneously. Even if there's even the whisper of an impending invasion of Taiwan by China, that's the key vulnerability. So it, it's not the same as ch uh, the Taiwan's holdings in the composition of tho those holdings. A, the same as, uh, uh, China's or Japan's, they're just as large as China's. But they're uniquely vulnerable. What would trigger something like that when, when you say that? A, a, a Taiwanese life insurance company that holds a lot of us treasuries is hedged a lot of, we're gonna lose a lot of people right there. Maybe we could talk about the mechanics. Not, not, not to go into too much detail, but just sort of why they hedge and, and more importantly. What does it mean? What would force them to sell? 'cause that really, I think, gets at the core of, of, of what's happening here. I think, Eric, if you can describe that process, how they're thinking there in terms of what they would have to do if suddenly there was a change in rates and exchange rates. For example, if it, the exchange rate pressure happened if years, uh. Uh, if you're the treasurer of this, of an insurance company in Taiwan, what do you do? What happens automatically? Right. So basically the mechanism of, um, what we might call a margin call is when, uh, by law these insurers have to liquidate. Uh, they're found that their, the money, if the, the, the people insurer, the insurers wants their money back. Right. So, um, if say there is a political event or if the do Taiwanese dollar are either appreciating or depreciating too much if they want their money back, right? Um, the insurance company by law have to sell the US bonds and bring the money back home. This is when we believe, um, will cost some problems to US dollars, right? Um, this event can also be triggered. By any, um, political crisis, right? Uh, we hear a lot of people talk about, um, contingencies in Taiwan, uh, being a military, one being having missiles shooting at Taiwan. People talk about, uh, the Silicon Shield where Taiwan semi doctors can protect Taiwan. I think Lyric and I had this idea, we wrote this article because not enough is being discussed about this financial and what this will happen. Basically we're saying even before a single missile or a single, um, battleship either blockading in Taiwan, St Trade or shot at to Taiwan, um, the market will already react. You will see if somebody whisper about, oh, uh, the Chinese might want to invade, or they're thinking about planning about invading, or they, they have thoughts about something, or Xi Jinping said something, the first reaction within Taiwan will be, oh, I, I'm gonna want my money back. I'm gonna call my insurance companies. Say, oh, I want, I want to take my money back. And the money they have insured, the money they have is in US bonds. Um, they're required by law to liquidate, and the United States is a democratic country By law. If, if Taiwanese insurer wants to sell, they have every right to do so and you cannot stop them. And this is what we're, describe it, the phenomenon here. So, uh, contrary, uh, to what many people believe, um, when this happens, um. When insurers have liabilities in Taiwanese dollars and they hold their asset in US dollars, um, then they're gonna swap right this when they want to hit this currency risk. Right? Um, the Taiwanese investors, um, will want. Taiwanese dollars back domestically, not that they wanna hold onto domi, uh, Taiwanese dollars longer. They want these money back home first. So, um, they have the liquid liquidation, right? So what might happen is Taiwanese dollar might appreciate sharply against US dollar, um, and the US asset might drop, drop in. Um, its in currency outright and in Taiwanese dollar terms, it would affect US treasuries. The price immediately. It sounds like it's, it's, it's the equivalent of what we would call a bank run. Not too dissimilar to what happened at Silicon Valley Bank. A bunch of depositors got panicked, uh, concerned about the bank and pulled their money, and that forced liquidations and it blew up the bank. But in this case, if there's. If there's, a's the much bigger bank. Yeah. I mean the, the than Silicon Valley. Yeah. Yeah. Mm-hmm. It's, it's, it's, it's, it's 800 or so billion dollars worth of US treasuries hitting the market in the span of hours. And not with malice, the forethought, you know, that everybody's worried about the Chinese dumping their treasuries, but they don't have any incentive to do that. That would, because then the value of their treasury, of their holdings would plummet. So why would you do that? All of a sudden, they don't need to do it because it's the government. They don't have the pressure of individual citizens. Demanding liquidation, as Eric just described, and that what could happen in Taiwan if China dumps their treasury. That's the important part. One of the important parts of this, of this important article was you said, if, if China decides to, to weaponize their, their treasury holdings, like so many fear, they're really shooting themselves in the foot. 'cause it, it comes at a huge cost. They will, they will collapse the value. Enormous cost to them. Billions and billions of dollars in hard currency. So I think that, that it's unlikely to happen. Uh, on the other hand, you can see that China has been getting rid of its treasuries over time. They have been offloading it, but they don't do it all of a sudden for the reasons that we just said. Right? It's not logical to do that. I have a picture in my mind of almost like a circular firing squad here. Right, exactly. Everybody's got guns pointed at each other. And Taiwan's in an interesting position, I mean e Eric, how do you, how do you think about that? I mean, if, if, uh, you, you've got a, you've got a, uh, an adv, an adversary, uh, very short span of water away that, uh, would, would like to see reunification. Um, and, and everyone sort of assumes that. Chips are, are the driver for all this geopolitical interest and action around Taiwan. But is it, is it chips or is, I mean, China would be shooting themselves in the foot if they invaded financially. Uh, in a way that I had never heard anyone talk about, but that I agree. People don't understand the mismatch between the, as Eric just said. I think it's really important to underscore that the mismatch between the assets and the liabilities. The assets in terms of Taiwanese dollars and the liabilities are in US dollars. So when there's a liquidation event, there is obviously a crisis that could occur. But the US Treasury has recently recognized this actually, and they have started to, there, there are discussions that are taking place that, uh, you know, Eric wrote about in the article. As well. And senior, I think senior Taiwanese officials are aware of this, this risk as well. So what can be done about it? Right? That's the key question. What can you do to mitigate the risk, Eric? See from me sitting in the US this sounds like a risk. You sitting in Taiwan, is it a chip? I mean, is it, is it, is it in some ways an asset? No. Many things cut both ways or many ways, right? Uh, you know, to answer your earlier question. Um, a different person sitting in the White House might think differently about how to handle the Taiwan issue or, or US China relations in great power competition perspective. Um, I, I, I am apolitical in US politics. I'm, I'm a trained diplomat. I don't take sides in US politics, but I think President Trump has done somewhat a very good job handling this situation, a very dedicated situation. Um, I think, um, a, he has somewhat de-risk, uh, the military, um, high tension between US and China, which is obviously good news for Taiwan. Um, I think b um, he has highlight, um, some of the, um, economic, um, activities that the US are trying to do to strengthen its own economy and manufacture capabilities. Um, I think here in Taiwan, um, it's not just about, um, semiconductors. Um, I think it's also about, um, how Taiwan can be, um, a closer ally even though we don't call Taiwan an ally, uh, from diplomatic terms. But how do we see Taiwan as a good friend, a US friend, we can invest in the US and how we can put our trust in the US. I think that shows us, um, Taiwan's not only a democratic friend, but it's somebody who trust the US and invest in the US that obviously straightened, uh, US Taiwan cooperation and relationship. So is that a deterrence? Is think, um, in many layers, uh, in many, um, indirect ways? The answer is yes. But obviously Taiwanese people don't think, um, buying us bonds as a deterrence. Um, uh, deterrence has to go through, um, military and economic and diplomatic, right? So there are three pillars here. Um, I think Taiwan is do everything to show our determination, to defend ourselves and not to star war. With Beijing. I think Ed, your point that, you know, perhaps having the chips, um, uh, manufactured in Taiwan, that Chi China would be careful about disrupting that flow, but also that this is another deterrent. That's a very interesting way of looking at it. Per, perhaps there's a, and I imagine that in at the People's Bank of China, they realize this as well. I can't imagine that they don't know that what would happen in Taiwan if an invasion were about to occur. You know, when this happened with, when Putin invaded Ukraine, the, the risk to the fight global financial system was minimal because we already were not doing a lot of business with Russia, but in this case, we're doing. Vital business with Taiwan, and if they invade and the Taiwanese dollar spikes higher because people say panic and say, gimme my money back, which is a rational response, uh, China inadvertently takes a huge financial hit. Right. It's very interesting. Yeah. It is. As you say, it's a circular firing squad. We all hope none of this ever happens. Absolutely. So, so, so you touched on lyric what can be done. To solve this issue or mitigate this issue to some extent, and that there are people on all sides talking about steps that can be done. What, what are some of the things that are being done to, to potentially make this less of a risk? What really need needs to happen is that you have to have, you know, an uh, an emergency swap. In place that should be negotiated and and put in place. And also I think in what we recommend in the article is that the G seven should get together and create a, a committee. Some sort of group that should something like this occur that they look at all these scenarios and that they have a plan to act together. During the global financial crisis, what really prevented the worst from happening was the coordination amongst the G seven central banks. But I'm not sure right now if they're aware of the risk. I think they are in Beijing. I think they are in Taipei. I'm not sure, probably in Tokyo, but I'm not sure that they're aware in the rest of the world that there's a discussion going on. I haven't seen much evidence of about it. Most of the discussion, as in the Economist article revolves around this idea, is the, the, the Taiwanese dollar overvalued. Undervalued, it's around currency. It's not taking a look, a deeper look at Taiwan's, uh, incredible, uh, treasury holdings. I think as I mentioned too, you know, we still have a picture of Taiwan as this very small player. We're beginning to understand the importance of Taiwan because of semiconductors, but our picture of their financial. Um, heft is really back in the days of Jimmy Carter, when the agreement about Taiwan was made between the US and China. Taiwan only had 10 or $20 billion in foreign reserve. That was it. Now look at it. The situation has radically changed, but recognition of Taiwan's important place in the global financial system has not yet been recognized. Eric, anything to add on that? I think likely this trend, um, will continue, um, that, that high either citizens or insure insurance companies will continue to buy US bonds. That's not gonna stop. Um, what is interesting in it, um, Derek and I are actually thinking about writing a sequel. Part two of this, um, is because, um, starting this month, this year, January 1st, 2026, um, by law Taiwan Taiwanese insurers must, um, um, reveal a mark to market their bond portfolio. This is a mechanism where, where ensure transparency and will make them reveal exactly how much of the duration risk they're carrying. So this, um, on top of the, um, November 14th joint statement between Taiwan's Central Bank and the Federal Reserve for, uh, where they have to re report. Quarterly on the intervention of any risk, uh, they might be facing. Right? So, um, we call this, um, the new era of transparency. So, um, once the structure transformation is in place in Taiwan's Finance system, financial system, even though the theoretical risk might still be, uh, visible, but I think, um. Investors will somehow have even a boosted confidence. So for, um, this trend to continue, uh, this is definitely something, uh, for us po uh, policy makers to think about. Silicon Valley Bank, uh, really got caught in the crosshairs of marketing to market their bond portfolio. That is what doomed them. So if they had been allowed to just have the, continue those holdings, it was the mark to market. Event that caused the failure of that bank. So I would be kind of worried about the transparency, even though I think long term it's a good thing. Um, there could be some surprises as those reports come in. This is one of those situations in that comes up in finance and economics once in a while where individual actors, whether it be households or. Banks or corporations, they all act in rational ways. They, they do things that are perfectly rational and make good sense and are good decisions for them at an individual level. And then when you aggregate, you find that there's this colossal risk that. Nobody really saw until like mbs Until you EE, exactly, exactly. It's, it's very similar to that. As those risks got concentrated in that, those new financial instruments, that's what created the, the problem, it's rational for someone to try to buy a home. Right at the lowest cost they possibly can, and for the banks to do as much of that business and the mortgage brokers as possible. Those are all rational things. But the con, it's the concentration at you're exactly. That's what, that's what we're trying to bring attention to here. It's the concentration of risk. You know, at Econ view, we think it's our job to try to bring these under-reported stories and risks that people should be thinking about that they haven't yet considered. This could have been the classic definition of a Black swan event. Something if something played out. So your illumination on this and, and Eric's suggestion of transparency, of current value, while it poses risks, I think it. It makes the job of that G seven committee that you're, that you're, uh, suggesting be formed, it makes their job 50% easier because they'll at least know what the heck is going on if, uh, if a crisis starts to hit. Right. You know, another thing I thought of, just as you know, thinking from a perspective by highlighting this risk, are we indeed creating more risk? In other words, people not knowing about it. You know, it's kind of like the Von Heisenberg uncertainty principle too. As you measure something, you have a, there's an impact that you have. And how do you not have that by showing what's going on? Um, I think in the end you have to come out as, as Eric said, you have to come out on the side of transparency. That's what makes our market so strong. That's what makes what's going on in China now so difficult. Their economy is suffering from the lack of transparency and the lack of information, the lack of data being shared, and I think it's a critical problem. So the truth always, it comes out anyway sooner or later. So I think it's. I'd have to say we came out in favor of disclosing this information so that people could make other plans and that something like the G seven, hopefully people can take more, um, action. But the US Treasury Department and Scott Bein, I think has a very good grasp of this, which is good. And it's obviously that the, the Taiwanese officials do too. I'll add another layer This. So in Taiwan, even though, um, all these insurer or financial institutions are, um, public traded companies, but they're essentially owned by just couple families, um, maybe a handful of companies owns all of them and they come control of them, all of them very firmly. I think that adds another layer of risk, uh, whereas they don't have a real strong. Shareholders, um, where families can make decisions, might only interest their own, uh, benefit. Um, this potentially can be something on top of a very rigid old school, uh, regulation. Financial regulation, even though a timely government are talking about loosening the regulation and making it more, um. 21st century. Um, we don't know when that might happen. So basically you're looking at Taiwan, where, um, this semiconductor is running very well on a very fast engine, but, um, the financial is very old school, uh, and very outdated. Going back to the geopolitical risk, it does not take an invasion of Taiwan for this to happen. It just takes a credible threat of an invasion. It takes potentially just a strong rumor. For this to, to begin, and I don't know how quickly it could be reversed. Have there been any false starts to this? 'cause you lay out in your econ view article, you both lay out the timeline of, of what a crisis could look like. And I think that was from a a, from from a US government, uh, age. Was that from the BIS or? Oh, we just came up with that. Oh, okay. That's just a scenario planning. Thing, but yeah, it was quick. Yeah, it's fast. It's hours. It's minutes. It's not days. I think it was two weeks ago, uh, China was doing one of their practice exercises where they, uh, if I read the article correctly, they ring, ring fenced, uh, Taiwan, um, with ships and aircraft. I mean, how, how, how does the market sniff out? What is. What is a real risk and what is just sort of. Political posturing and gamesmanship with the addition of the Japanese new, the new position by the new Prime Minister of Japan, Takai. That's another, uh, element of this, but yeah, Eric, that's a, you know, I wondered that too, how. When would someone in Taiwan people are, you know, probably more skeptical in Taiwan about the reality of something happening? Are they becoming less skeptical? What would be a trigger for these, for this to start happening for people in Taiwan to say, yeah, this is really, this game is on the past 20 years, every four years. Um, in Taiwan, we, every four years we have a presidential election. So every four year cycle, you, you often hear politicians say. This is the most important election of your lifetime if you don't vote. But I've never heard that before. Exactly. Now I think of it, maybe that's even an understandment, maybe 30 years. Right. So I, I think Taiwanese people are just so used to hearing these type of things. And even if you look at the, the, um, the, the, the, the, the military exercise, PLA exercise that Ed just mentioned, what they, um, call the justice mission 2025. If you look at military like pound, pound to pound, pound by pound is, is actually. Very dangerous. Um, you know, they're, they're circling around Taiwan. Um, and you can be just short of World War III if the US decide to incubate. Um, but I think what might actually take for Taiwan needs to panic as the question is just to one of these big families that owns these financial institutions. People, you know, swift wind of, you know, rich people getting their money out or they're making some type of thing and the market can just panic in seconds or maybe one of these days. Um, if somehow Taiwanese belief the US has a new policy where, um, they no longer want to defend Taiwan, maybe the whole sentiment will change overnight. Uh, this is a very dedicated issue. Even though Taiwanese people have the thick skin today, doesn't mean that sick skin, skin will always carry. So I think a number of issues, my, um, and this, this things is something I, I, I hate to say is hard to predict. Um, I will say anything might trigger the event. Anything big or small? Uh, it's just hard to say to me. With the increased military operations, and I don't know if you've seen on social media, China, uh, uh, Taiwanese social media, I saw the conversation between a Taiwanese pilot and, um, a, uh, a People's Liberation Army pilot, and they were taunting each other actually. And so I thought, boy, this is really dangerous behavior if it's, this is not an AI simulation, that this conversation is real. But when you have that level of operations, um, some, an accident could, that would be my concern is an accident happens and there's loss of life. Yeah. On both sides and the US gets involved and then we're off to the races. Yeah. A plane or a helicopter, uh, collision, uh, that lands on the mainland, uh, or, you know, or, or lands on the island. Think about it. Yeah. Like a U2 kind of thing. Uh, uh, if you go back that far, I think that's, to me the clearest. Um, that's where everything could come home to roost and I don't know if the US. And China have a hotline to deal with that, or they have effective communications with counterparts, especially given the fact of all of the changes in the Chinese military recently, all the leadership changes. Is there a clear line of not just in, I think there's a clear line of command in the US obviously, and we're working very effectively. Whether you agree with it or not, between the executives, uh, between the administration and the military. But in China is the same thing. True. I'm less convinced of that. Do we have on the US side any relationships with the folks in the Chinese military to be able to, with their fingers on the button trust? Yeah, exactly right. Yeah. So that concerns me. You sort of casually mentioned, uh, AI. Um, but, but I, I mean, I actually think I, I'm just, in the past week, I've been shown, people have been sent really smart, successful business people who've made a lot of money, have sent me links to videos on YouTube that are deep fakes that they're, and they're asking me. What do you think? Is this real, um, wow. The role of disinformation? Yes. I mean, it's getting to point to be critical point where it's almost impossible to tell. Um, and I mean, one of them had me sitting in front of, uh, my laptop Googling at 10 o'clock at night because I, I wasn't a hundred percent sure. So I, you know, yet another thing that goes well beyond this discussion, but yet another challenge that, uh, geopolitics has to face in there could be a, you know, like war the worlds with Orson Wells. Mm-hmm. Right. You know, where people really thought we were being invaded. Exactly. That did happen, and that was way before AI that was on radio, but a famous example where a panic could be falsely, um, falsely incited. I just thought a very good example to share with, uh, all of our audience how Taiwan might feel about an invasion and what might, what, how one event might actually trigger that panic. Just about a month ago, um, there was a video air online basically claiming, um, that a PLA drone has flung over to Taiwan to capture pictures of Taipei 1 0 1 Taiwan's landmark building. So the argument is really that can a POA drone really flew all the way into Taiwan and capture the video. If you think about, uh, the reactions on Taiwanese people had is A, they thought it was the AI think, um, and BI think most people reacted is quite accurately that it might very well be a PLA drone, but there's no way you flew all over into Taiwan's airspace. So the most likely scenario is, um, a. A operative who currently lives in Taiwan who hasn't been cut, put on a drone and just basically video that that thing and tried to decimate fear into Taiwan. But I thought it was very interesting how Taiwanese people reacted so calmly that most people just straight up calling it AI fake. Um, I don't know honestly if that is good or bad. Um, I think many things depends. It cuts both ways. But you know, this just an example of how Taiwanese react to these type of daily events. So that is to say a military hot war might not be happening right now, but grave zone warfare between Taiwan and China is actually happening every day. Eric, I, I can't resist asking you, since you're sitting in, in Taiwan, what is the general thinking about TSMC? Building a facility in the United States, um, from Taiwan's perspective, I mean, 'cause I, I think that from the US perspective, it's, it's a move to de-risk, right? We wanna get T SMCs, uh, incredible deep knowledge in, in, in fabs and chip production. We wanna get that onto our, uh, our, our shores. We want to get their, their knowledge, um, transferred here. What, what does that mean for us support of Taiwan, uh, after that happens? Is there, it, does it deepen the support? Does it lessen the support or is it just, just how things are going to be and you can't stop it? Well, the argument always goes both ways, right? I, I, I would simply lay out both arguments and I, I will con cool with my own job. Right. One side of the argument is that if Taiwan's, um, so-called technology has been hollowed out and, and moved to the us, Taiwan will no longer of be of value, right? That's one argument. Of course, the counter to that is that A, um, most of the r and d that TSMC do remains in Taiwan. So we look at chips, right? They, every year they advance, right? So you cannot just simply have a fab move to Arizona, but you have to, um, every year have r and d done and upgraded, right? The r and d is still in Taiwan, and that's mostly, um, um, talented people, right? Brain power. And second, on top of that, when you talk about, uh, Taiwanese moving up fast to Arizona, um, I, I, I, um, don't want to offend anybody, but I, I assume a lot of people who lives in Arizona otherwise would never heard of Taiwan and would never even meet a Taiwanese if they never choose to travel to our island, right? So. In a way that's very good diplomacy and people read about Taiwan and t right? So both arguments are legitimate and it depends how you look at it personally. Um, a I think at your, your a hundred percent correct, there wasn't really a choice between Taiwan. It was a national security, uh, consideration that we want to strengthen and cooperate with our, um, with our security guarantor in the United States. I, I personally believe, and I'm very confident that TSMC going to Arizona or elsewhere around the world will help Taiwan, um, build our relationship and, and through that make Taiwan a, uh, peaceful member of an international community. Therefore, uh, will help us defend ourself and in itself it could be a deterrence. I think that's a very interesting point. About, you know, creating these greenfield investments in the us. Um, you know, we, uh, uh, probably some of your, um, viewers don't remember, but we once had a very, um, uh, difficult trade, uh, relationship with Japan. We had a trade war with Japan, and the way that was resolved was that Japanese automakers in particular started to produce. In the United States, and I worked with some of them in the auto parts manufacturers, but that was clearly a great idea. And the Perce and then, you know, the local Honda factory in Georgia then sponsored the little league team. You know, it was seen as a giver of jobs and as a, a member of the community rather than as, um, uh, a threat to the us. So, uh, yeah, so I, I think it's a similar model to that, Eric. I think, yeah, this kind of investment here and certainly with this administration, there's a huge push to do this. I guess the question is, if Taiwan does this, will the US actually, um, um, is, uh. Create more security for Taiwan itself. That is the question one that we can't answer today because it's very late for Eric sitting in Taiwan, uh, past his bedtime. I, I, I really, really appreciate both of you joining me. The article that you wrote, which is posted on Econ view, which is econ VUE. Com. Right. Thank you. Thank you. And, and also on Substack, I mean, it's a, it's a must read. We only scratch the surface of this topic here. Uh, can't recommend that article and the work that you do, lyric and Eric ov you can't recommend it enough. Thank you both so much for taking the time. This was fun, ed. As as always, take care. Happy New Year to everyone. Happy New Year. Happy New Year. I've got some great guests lined up over the next several weeks, including Liz Ann Sonders, George Friedman, Lacey Hunt, Louis Gave, and Marco Papic. So be sure to subscribe so you don't miss any of these conversations. And be sure to check out Lyric and Eric's work at EconVue. There's a link in the description below. Thanks for watching.