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I'd go a step farther (or maybe less far). All the US creditors demand their money back. The US prints new $ to pay them. What is the impact? People now have

I'd go a step farther (or maybe less far). All the US creditors demand their money back. The US prints new $ to pay them. What is the impact? People now have a bunch of $ sitting under their mattress instead of treasuries. However, those treasuries were already effectively as good as $, since the market for them is highly liquid. If someone wasn't going to spend their wealth when it was in the form of treasuries, their not going to suddenly decide to spend it just because it is in the form of $. The real risk in this scenario is not that people are cashing in their debt; but rather the reason they are doing so. If they are cashing in on their debt because they want to get out of USD all together, the US will have a major problem. But that problem is people moving out of USD; the cashing in of the debt is just a symptom. They could also be doing it because they have stuff they want to spend USD on. Generally speaking, we like it when people spend USD, as that is a sign of a healthy economy. But if people suddenly decided to spend all of the wealth they had been saving in US debt, we would be in a very market. But, again, the problem hear is the overheated market; it doesn't matter that the mechanism is people cashing in on their US debt instead of other savings vehicles. For all practical purposes, the effect of the debt occurs when the government re-spends the money they got as a result of issueing the debt. In exactly the same way fractional reserve banking increases the money supply by issuing debt and having the debtors spend it; treasuries increase the money supply by issuing debt and having the debtor (US government) spend it. The only difference is the debtor has the option just increasing the money supply any way. As a practical matter, US bonds play an important role in the financial system, and it is not clear what would replace them if people suddenly stopped using them.

lasagnaphil 6y ago
Good point, your last sentence is what I've been wondering about for some time. From the past decades we have learned that there are clear economical and political disadvantages of having your currency as the world reserve currency - namely the Triffin Dilemma (https://en.wikipedia.org/wiki/Triffin_dilemma https://en.wikipedia.org/wiki/Triffin_dilemma). I think China already knows this from observing the US and might actually be hesitant on making their Yuan as the world reserve currency. Alternatives like Bitcoin might sound cool at first but isn't really a good solution because of its mathematical destiny as a deflationary asset, and that it can't be modulated effectively throughout monetary policy - only math and speculationary greed governs it! In an ideal world a system like the Bancor (that Keynes originally proposed) would be established if all countries have understood this dilemma and tried to come up with a peaceful solution for world trade. But China seems more and more unlikely to abandon their imperialist ambitions especially after Xi Jinping's inauguration (which to be fair, they've learned from previous empires like the Europe and the US). There is quite some possibility that the reserve status of the US dollar will continue to slowly deteriorate, but there wouldn't be an alternative - we would be trading with a mixture of yuans, euros, dollars without any global consensus, and things would surprisingly run as nothing has happened. But then there is also some possibility that there will be a full-out global war between the old and new empires, and at that point the question of world currency and world trade becomes politically redundant.
makomk 6y ago
The real risk here is if inflation makes a reappearance, say as a result of people starting to spend all that money floating around. As I understand it the way to deal with that is to raise interest rates, which means that the cost of servicing all that debt suddenly increases for everyone that holds it (both the US government and private individuals). This could be really painful. In this scenario, the problem is the combination of both the large amounts of debt and inflation rearing its head; either one alone would be manageable.

lasagnaphil 6y ago

Good point, your last sentence is what I've been wondering about for some time. From the past decades we have learned that there are clear economical and political disadvantages of having your currency as the world reserve currency - namely the Triffin Dilemma (https://en.wikipedia.org/wiki/Triffin_dilemma https://en.wikipedia.org/wiki/Triffin_dilemma). I think China already knows this from observing the US and might actually be hesitant on making their Yuan as the world reserve currency. Alternatives like Bitcoin might sound cool at first but isn't really a good solution because of its mathematical destiny as a deflationary asset, and that it can't be modulated effectively throughout monetary policy - only math and speculationary greed governs it! In an ideal world a system like the Bancor (that Keynes originally proposed) would be established if all countries have understood this dilemma and tried to come up with a peaceful solution for world trade. But China seems more and more unlikely to abandon their imperialist ambitions especially after Xi Jinping's inauguration (which to be fair, they've learned from previous empires like the Europe and the US). There is quite some possibility that the reserve status of the US dollar will continue to slowly deteriorate, but there wouldn't be an alternative - we would be trading with a mixture of yuans, euros, dollars without any global consensus, and things would surprisingly run as nothing has happened. But then there is also some possibility that there will be a full-out global war between the old and new empires, and at that point the question of world currency and world trade becomes politically redundant.

makomk 6y ago

The real risk here is if inflation makes a reappearance, say as a result of people starting to spend all that money floating around. As I understand it the way to deal with that is to raise interest rates, which means that the cost of servicing all that debt suddenly increases for everyone that holds it (both the US government and private individuals). This could be really painful. In this scenario, the problem is the combination of both the large amounts of debt and inflation rearing its head; either one alone would be manageable.