Randy Wray: What If China Dumps US Treasury Bonds? Paul Krugman Inches Toward MMT

Yves here. While I agree with Wray’s post, there’s a small caveat I wish he had included: China will continue to take US dollars as long as it exports to the US. There does not appear to be any near or intermediate term risk of that changing. Ironically, the US and other advanced economies have been urging China to rebalance, as in generate more of its demand for its manufacturing capacity internally and export less. China has not made much progress in that direction. Japan was also encouraged in the 1980s to become more consumer driven. Instead they managed to engineer an bubble and bust, and only Abenomics (not necessarily by design) has led to a reversal of the island nation’s long-standing trade surpluses.

By Randy Wray, a professor of economics at the University of Missouri, Kansas City. Cross posted from New Economic Perspectives

Our deficit hysterians love to raise the specter of China. Supposedly Uncle Sam is at the mercy of the Chinese, who have a stranglehold on the supply of dollars necessary to keep the US government above water. If the Chinese suddenly decided to stop lending those scare dollars, Uncle Sam would be forced to default.

Can anyone, please, explain to me how the sovereign issuer of the US dollar—Uncle Sam—could ever run out of his supply of dollars? Please, give me one coherent explanation of how that could happen.

And please explain to me how China got those dollars in the first place. So far as I know, every single dollar the Chinese have comes from the USA. There are two sources: US lending and US spending. China loves the second: Chinese work hard to produce stuff to sell to America so they can get dollars.

Folks, all the dollars the Chinese have came from the US. There is no net supply of dollars from China.

They get dollars from net exports to the US. These end up at the Bank of China. The Bank of China rationally prefers to earn interest on dollar holdings, so these are converted to US treasuries. This is nothing more than a balance sheet operation on the books of the Fed: Bank of China reserves at the Fed are debited and Bank of China treasuries are credited. There’s no net flow of dollars to the US Treasury.

If the fear mongers are correct, China might decide to reverse that operation: exchange the treasuries for reserves at the Fed. And then, who knows what. Maybe China will choose to buy Greek treasuries?

I doubt it, but so what. There are plenty of holders of Greek treasuries who want to unwind into the safest asset in the world—Uncle Sam. If China wants to play the dupe, there are plenty of others willing to take the other side. (Hint: China ain’t the dupe. Maybe some US hedge funds want to play dupe?)

Worst case scenario? The US dollar might depreciate against some other currency. That’s a long-shot but it could happen. Will that push up US interest rates? Doubtful. The US Fed determines the short rate, and the global search for safe assets plus expectations of future US Fed policy determines the longer rates.

Guess what. As we head into the next GFC, the US continues to look awfully good. Don’t bet against the dollar or US interest rates. Uncle Sam wears the biggest pants in the world.

Krugman continues to inch away from ISLM thinking and toward MMT. Witness his latest post:

Who’s Afraid of China?

But the crucial point, which Mr. Yglesias touches on only briefly at the end, is that whatever China’s motives, the Chinese wouldn’t hurt us if they dumped our bonds – in fact, it would probably be good for the United States.

But, you say, wouldn’t that send interest rates up and depress the American economy? I’ve been writing about this issue a lot in various guises, and have yet to see any coherent explanation of how it’s supposed to work. Think about it: China’s selling American bonds wouldn’t drive up short-term interest rates, which are set by the Federal Reserve.

It’s not clear why it would drive up long-term rates, either, since these mainly reflect expected short-term rates. And even if Chinese sales somehow put a squeeze on longer maturities, the Fed could just engage in more quantitative easing and buy up those bonds. It’s true that such actions could possibly depress the value of the dollar. But that would be good for America!

Right! Again, I doubt any significant dollar appreciation will occur. The US, as a sovereign currency issuer, faces no financial constraint. It cannot be forced into default. It controls its policy interest rate.

The rest of the world are users of the dollar, not issuers. They can never hold us hostage.

Print Friendly, PDF & Email


  1. Yonatan

    It ain’t the supply that is the problem. The problem is China has so much dollar capacity, it could outbid the US (i.e they offer $1.01 for ever $1 the US offers) in deals with third parties in exchange for resources. China knows (as should anyone) that the dollar is no longer worth the paper it is printed on. Only inertia keeps the dollar supremacy going. Iraq, Libya and Iran tried and are trying to buck that. The first two weren’t big enough to survive. Iran might. The BRICS also have the mass to do it.

    1. Ben Johannson

      How can China, with 2-3 trillion dollars, outbid the United States with many tens of trillions and the ability to produce unlimited quantities more?

      The impression I get is that many people need something to feel anxiety about.

      1. proximity1

        RE: “How can China, with 2-3 trillion dollars, outbid the United States with many tens of trillions and the ability to produce unlimited quantities more?”

        Read more at http://www.nakedcapitalism.com/2013/11/randy-wray-what-if-china-dumps-us-treasury-bonds-paul-krugman-inches-toward-mmt.html#JzFMXhjVGv5xjhkT.99

        Simple. The U.S. do not have tens of trillions of dollars. I think you’re confusing the so called value of traded (i.e. exchanged) goods and services; that is, arbitrarily measured estimations of GDP, or of momentary snapshots of stock and bond market “values” as balances on paper.

        If you don’t immediately understand the problem with such yardsticks then you learned nothing from the punishing lessons of the last several market bubble crashes and you paid too much for your education in economics, focusing on idiotic theory at the expense of common sense.

        Briefly, not all holders of economic goods’ (which ultimately boil down to future promises to redeem present titles to hoped for future surplus gains) can be redeemed at all, much less at a profitable return on investment. Instead, some portion of these future promises are unredeemable and, thus, essetially worhtless. When bubbles burst, the unwinding process reveals which are the worthless titles to future promised gains.

        Question for you : If all of that isn’t true, then why is there such anxiety surrounding the much anticipated end of “Quantitative (W)Eas(el)ing” ?

        1. Ben Johannson

          Nothing you’ve written here even remotely addresses my comment. You made the absurd suggestion China can outbid the U.S. in USD, meaning that for some bizarre reason you think China has more dollars than the country that creates them.

          There will never come a time when China can offer more of our currency than we can because it’s our currency.

    2. from Mexico

      @ Yonatan

      You might find this documentary film interesting. It is French-made, but this version spoken in English:

      “China Vs USA : The Battle for Oil”

      The appearance certainly is that when China comes to the bargaining table, it brings its check book, whereas the US brings its drones.

      But I agree with Ben Johannson. The reason the US doesn’t bring its checkbook to the table is not because the US has any shortage of dollars, but because it believes it can take the oil by force without any further ado. This is a policy decision, predicated on the fact that the United States is ruled by neocons, Obama perhaps being the most notorious of a long line of these.

      1. eeyores enigma

        Neocon or neolib the trillions of $ (or treasuries/debt) Chinese hold only has value if the dollar is strong, and the dollar is strong only if the Military is strong.

        Does anyone else have over 1000 military bases scattered around the globe with concentrations in resource rich areas?

        All this talk of a shift in dominance through passive means is total carp.

        1. from Mexico

          Ah, the neocon mind is a wonder to behold!

          As Andrew J. Bacevich summed it up in The New American Militarism:

          Podhoretz did much to create and refine the fiercely combative neoconservative style. That style emphasized not balance (viewed as evidence of timidity) or the careful sifting of evidence (suggesting scholasticism) but the ruthless demoliiton of any point of view inconsistent with the neoconservative version of truth, typically portrayed as self-evident and beyond dispute.

        2. from Mexico

          And, eeyores enigma, what have ye to say to this?

          If one includes America’s array of privately outsourced services along with a professional permanent military, the costs run around three-quarters of a trillion dollars a year. Chinese, Japanese and other central banks of East Asia via Bretton Woods II indirectly finance this cost. Since these countries also indirectly compete with the U.S. for the same energy resources, we have a paradoxical situation in which they are in effect “feeding the hand that bites it.” This is inherently unstable as the foreigner eventually realizes that the provision of capital to a country engaged in war enables that country to invest more in military equipment — equipment that can ultimately be used against them. In such circumstances, America’s eternal creditors will decide that they would rather invest the accumulated current account proceeds in their own military jets and equipment for themselves. That is to say, they would prefer to own the jet rather than finance it for the U.S. Then the “magic” of Bretton Woods II disappears.

          –CHRIS P. DIALYNAS and MARSHALL AUERBACK, “Renegade economics: The Bretton Woods II fiction”

          1. PJames

            “America’s eternal creditors will decide that they would rather invest the accumulated current account proceeds in their own military jets and equipment for themselves. That is to say, they would prefer to own the jet rather than finance it for the U.S.”

            You mean they would rather spend their dollars to buy things from the US, instead of saving those dollars? That means an increase in demand for US goods, and a reduction in the trade deficit. Is that bad?

        3. Kurt Sperry

          Hold on a minute. By what mechanism does having ruinously expensive military bases all over the world confer a competitive advantage in trade? This seems to be quasi-axiomatic proposition but I’m not buying it as such.

    3. strider

      And what is the yuan worth? Oh right, NOTHING. The Yuan isn’t worth the paper it’s printed on either. The PBOC is printing Yuan as fast as they can just like every other government. And what are they printing those Yuan against? Oh right, their US Treasury bill/bond assets.

      This is a form of MAD – if China dumps treasuries they take themselves down too.

  2. Clive

    I am thinking of sending this article out with my Christmas cards this year. A merchandising opportunity for NC would be to market a “cut out and keep” collectors’ edition, on special glossy paper.

    Frankly, I for one am at a loss for how to correct the fundamental misunderstanding that the “bond vigilantes” are ever present, lurking in some shadowy corner out to get us and we have to somehow keep them sweet to avoid a catastrophe. I mean, just take a look at this sort of nonsense and the emotive presentation: http://www.debtbombshell.com/ I hope US readers can provide a selection of “best worsts” on this subject. Here in England, the favourite of the MSM is an apparently “famous” US debt clock on some building in NY I think. It actually made the news when they had to add an extra digit onto the ticker. Next time I’m there, I plan to deface it by sticking a poster of Miley Cyrus over it, or something equally inane.

    Here in the UK, the Bank of England has vacuumed up over a third — yes, more than one in three pounds of UK government debt — of the outstanding gilts (our name for government bonds).

    Here’s the balance sheet (spot the gilts as a proportion of the total. Hint: it’s the absolutely ginormous chunk of purple)


    The Bank of England stopped bond purchases because they wanted to stop. Mainly because they were getting to the point where they were pushing on a string in terms of the official version of why QE is being undertaken (lowering money market rates). I won’t digress into a QE debate here, the point is, Central Banks (which are basically governments, I’ve never bought into this “independence” cant) can buy up all the government debt that comes onto the open market, if they so choose.

    If the UK doesn’t “need” China to purchase its sovereign debt, the US certainly doesn’t.

    China, like Japan, bought the bonds to keep their currency down vs. the dollar. Simple as that. If at any time they tire of holding them, they can sell them. Perhaps Li Keqiang likes rolling around naked in them, I don’t know. If they sell them, they will then in return get either other sorts of ForEx (which will push the price up of those country’s currencies, this is how currency wars start) or get their “profits” back in Renminbi. Then the Chinese currency will appreciate, their exports will reduce as they become more expensive and their imports will increase as they get more affordable.

    When you get, by the standards of economics, something so straightforward and easy to understand and yet which is subject to so much misinformation, I do begin to wonder who is peddling what messaging and why. If their attempts at mass consciousness shaping were ineffectual and harmless, I wouldn’t be bothered by it. Unfortunately it isn’t.

    1. Ben Johannson

      This is testimony by Fed Chairman Marriner Eccles in 1947 to the House, on the proposed institutional arrangements that we still have today:

      Mr. ECCLES. One day. For instance, this was in 1943, and that
      overdraft started on March 2 at $3,000,000, and it grew each day until
      on March 15 it reached $1,302,000,000. On March 17, it was down to
      $981,000,000, and it went down each day until, on March 30, it was
      all paid off. So, from the 1st of March, it went up from $3,000,000
      to the peak, on the 15th; and on March 30, there was $40,000,000,
      and that was all paid on the next day.
      Mr. SPENCE. I assume the reason the authority w^as repealed in
      1935 was because of the existing conditions, then, when there was no
      reason for the authority: is that correct?
      Mr. ECCLES. Well, as I remember the discussion—and I have referred
      to it in this statement—there was a feeling that this left the
      door wide open to the Government to borrow directly from the Federal
      Reserve bank all that was necessary to finance the Government deficit,
      and that took off any restraint toward getting a balanced budget.
      Of course, in my opimon, that really had no relationship to budgetary
      deficits, for the reason that it is the Congress which decides on the
      deficits or the surpluses, and not the Treasury. If Congress appropriates
      more money than Congress levies taxes to pay, then, there is
      naturally a deficit, and the Treasury is obligated to borrow. The
      fact that they cannot go directly to the Federal Reserve bank to borrow
      does not mean that they cannot go indirectly to the Federal
      Reserve bank, for the very reason that there is no limit to the amount
      that the Federal Reserve System can buy in the market. That is
      the way the war was financed.
      Therefore, if the Treasury has to finance a heavy deficit, the Reserve
      System creates the condition in the money market to enable the borrowing
      to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future.
      So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.


      1. Ben Johannson

        In case the point isn’t as clear as I’d thought, the bond market is funded by the government rather than government being funded by the bond market. The market is simply a policy tool of the Fed and Treasury.

      2. Jim Haygood

        ‘There is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed.’ — Marriner S. Eccles

        Precisely. The Federal Reserve represents permanent war finance, with the peacetime gold standard indefinitely suspended.

        Which is why we have permanent war now. Two minutes of hate for the Taliban!

        1. from Mexico

          As you well know, I vehemently disagree with you on the utility or practicality of bringing the gold standard back from the dead.

          However, I do worry, as you do, about how US leaders have so blithely abused monetary, fiscal, and regulatory policy in order to provide the US with a cheap form of “permanent war finance.”

          Here’s how Chris P. Dialynas and Marshall Auerback put it:

          All parties that have embraced the conventions of BWII have had good short-term reasons for doing so. The U.S. has acceded to this arrangement because it has served to boost U.S. asset prices and lower risk spreads, thereby helping to facilitate America’s “guns AND butter” foreign policy. In the absence of its Asian creditors acting as “dollar sub-underwriters of last resort,” it is hard to envisage a chronic debtor country like the U.S. mounting successive wars with little financial strain and an absence of tax increases.


          The U.S. has been perfectly happy to accede to the current state of affairs in spite of the immense economic damage it has inflicted on its domestic manufacturing sector (and the concomitant evisceration of its middle class) because it has provided the country with a cheap form of war finance, a particularly important consideration as it has gradually militarized its energy policy. If one includes America’s array of privately outsourced services along with a professional permanent military, the costs run around three-quarters of a trillion dollars a year. Chinese, Japanese and other central banks of East Asia via Bretton Woods II indirectly finance this cost.

          –CHRIS P. DIALYNAS and MARSHALL AUERBACK, “Renegade economics: The Bretton Woods II fiction”

        2. Pjames

          “Precisely. The Federal Reserve represents permanent war finance, with the peacetime gold standard indefinitely suspended.

          Which is why we have permanent war now.”

          What you’re saying is that we have war now because we don’t have peace. If we had peace, according to you, we would have the gold standard. Not the other way around, because as you say the gold standard is indefinitely suspended when we are at war.

          So all that you are saying is that we are at war because we are not at peace. Which is a trivially and obviously true statement and completely and utterly lacking in any insight whatsoever.

        3. Ben Johannson

          The Fact that governments can drop the gold standard any time they choose is not an argument in its favor. Historically that monetary system has never prevented war simply because one government cannot impose constraints on a future one.

          Eccles, Keynes and many others made the point that the sort of system which created full employment and strong wage growth for purposes of destruction could be used to do the same for purposes of peace. There’s simply no excuse for material poverty in a nation of super-abundance and I’m tired of being told everyone can’t have a good life because we’re out of money.

          1. Carla

            “There’s simply no excuse for material poverty in a nation of super-abundance” — Agreed

            “…and I’m tired of being told everyone can’t have a good life because we’re out of money.” Me, too.

            Do you think it’s possible the reason we’re being told that is because the tiny elite who control all the money remain firmly in charge, and they plan to keep it that way?

            Do you see any sign that TPTB have the slightest concern about formerly middle class peons, much less those who have been mired in poverty for generations?

      3. s spade

        For those who still don’t understand, it isn’t government borrowing that matters, but private borrowing. Private credit expansion creates prosperity so long as (bank) lenders continue drinking the Kool Aid. When lenders get frightened and credit expansion stops, depression ensues, but depression is now called recession, which is less frightening, except to those whose supply of dollars has shrunk or been cut off.

        All this talk about government deficits is really about reducing the social safety net. Nothing else. There is always plenty of money for war and defense boondoggles and national security fear mongering. None of the deficit hawks would dream of cutting that.

        1. from Mexico

          A positition paper published by the Peter G. Peterson Foundation a few weeks ago provides a great example of that. Spending for social security and medicare is evil incarnate, but military spending is sacrosanct. It never ceases to be amaze the contortions of logic necessary to justify such a double standard:

          Current fiscal policy is unsustainable and large, prospective deficits and debt, driven by “mandatory” spending on social benefits for the aging population and insufficient revenues, pose an eventual threat to the U.S. economy….

          Results developed here suggest that the recent fiscal drag, in combination with heightened fiscal uncertainty, has slowed the annualized rate of growth in the nation’s Gross Domestic Product by as much as 1 percentage point since 2010….

          In coming decades, outlays climb because of rapid increases in “mandatory spending” for Social Security and healthcare, which reflect an aging population and the rising relative price of healthcare. In contrast, CBO projects that under current law “discretionary spending”—outlays budgeted through the appropriations process primarily to fund operations of the civilian government and the US military—will fall from 8% of GDP in FY 2012 to 5.3% by FY 2023, the lowest level in half a century. Hence, the nation’s fundamental fiscal problem is not the immediate size of government, but rather unfunded promises of future entitlements.


          So just like Ronald Reagan, Peterson is all for big government, but big government of the transnaitonal corporations, by the transnational corporations, and for the transnational corporations.

    2. DakotabornKansan

      The UK Debt Bombshell reminds me of this quote by David Graeber:

      “The fact that the US can, at will, drop bombs with only a few hours’ notice, at absolutely any point on the surface of the planet. No other government has ever had anything remotely like this sort of capacity. In fact, a case could well be made that it is this very power that holds the entire world monetary system, organized around the dollar, together.” – David Graeber, Debt: The First 5,000 Years

      1. skippy

        “The fact that the US can, at will, drop bombs with only a few hours’ notice, at absolutely any point on the surface of the planet. No other government has ever had anything remotely like this sort of capacity”

        Skippy… whatcha smoking…

      2. from Mexico

        I disagree.

        Aaron L. Friedberg anaylizes Great Britain’s slow but inexorable decline in The Weary Titan. It began in 1870, and by the end of WWII it was all over.

        Friedberg theorizes that great global hegemonic Empires like Spain, Holland, Great Britain and the United States are founded on three pillars of power:

        1) Economic power (productive power)

        2) Financial power (“dollar supremacy,” in the case of the United States)

        3) Military power

        But as you can see, military power is only one of three of these. There undoubtedly exists a cause and effect relationship between the three, even though I have no idea what that might be.

        I can tell you this. None of the three great hegemonic empires which preceded the United States in the capitalistic era — Spain, Holland and Great Britain — has managed to sustain world hegemony once its economic (productive) power has went into relative decline.

        But hey, maybe the United States will be the exception, and the neocons will be proved right.

        1. from Mexico

          And if we want to expand our horizons a little bit, from those of narrow ammoral realpolitik to the classical (moral) realism of folks like E.H. Carr, Hans Morgenthau and Reinhold Niebuhr, then another factor comes into play, that of moral power. Here’s how Jonathan Schell explains it:

          The power that flows upward from the consent, support, and nonviolent activity of the people is not the same as the power that flows downward from the state by virtue of its command of the instruments of force, and yet the two kinds of power contend in the same world for the upper hand, and the seemingly weaker one can, it turns out, defeat the seemingly stronger, as the dissolution of the British Raj and the Soviet Union showed. Therefore, although it may lead to paradox and linguistic tangles to speak of martyrs as being more “powerful” than the authorities who put them to death, the exercise is inescapable. For it is indeed a frequent mistake of the powers that be to imagine that they can accomplish or prevent by force what a Luther, a Gandhi, a Martin Luther King, or a Havel can inspire by example. The prosperous and mighty of our day still live at a dizzying height above the wretched of the earth, yet the latter have made their will felt in ways that have already changed history, and can change it more.

          –JONATHAN SCHELL, The Unconquerable World

          1. eeyores enigma

            Mex – History is important but it doesn’t always predict the future.

            It truly is different this time…by an order of magnitude.

            There isn’t enough energy in the system for another Imperial Epoch such as history illustrates and certainly won’t come about via a passive evolution.

            There will be an Epoch but not in a good way for anything alive.

        2. Banger

          None of the military powers you mentioned had the military superiority of the United States. I repeat none and it isn’t even close. No other country can destroy the life on earth as we know it other than the U.S. No combination of countries working together could challenge the U.S. in conventional military power. The U.S. has countermeasures to every possible threat and has the capacity to know if other military powers are even thinking about challenging U.S. power.

          Yes, the U.S. in decline in many ways but the military, though wasteful and redundant, is still capable of inflicting enormous damage. It’s weakness lies in fighting colonial wars against insurgents.

          1. from Mexico

            Well I know from your past commentary that you are completely consumed with the neocon vision of the world, for example from your comments in this thread:


            But as I pointed out on that thread, there are many very knowlegeable people who do not buy into your neocon vision of US global hegemony or full spectrum dominance.

            1. Banger

              I’m sure you would have done well as one of Uncle Joe’s prosecutors. Of course I’m not going to agree with you on my counter-revolutionary proclivities but whatever. How those characterizations serve the discourse here I can’t see.

              If I could characterize my basic political position it is that I am an anarchist who believes that a stable and compassionate social democratic state is the best path towards anarchism. Unfortunately it looks like the road is now closed mainly due to the stupidity of the social democrats in the U.S. and elsewhere who prefer fantasy to reality. If that makes me a neocon and an elitist then so be it.

              1. James Levy

                Mexico, your blithe dismissal of the fact that the United States can simply destroy any other power on Earth is odd. This is a material fact. It counts for something in the councils of power around the globe. The concomitant fact that this military power does not guarantee policy outcomes does not count for much to the millions of people who have been killed or maimed by US military power since 1950. The Americans can smash their way in just about anyplace and wreck the joint. That, like Daisy and Tom Buchanan, they might have to skip out after they trash it doesn’t count for much if you are Myrtle, Wilson, or Gatsby.

                Again, I am not saying that US military power is anything like a guarantee of endless American hegemony–it isn’t. And yes, I read The Weary Titan, and War and Change in World Politics by Gilpin, and The Rise and Fall of the Great Powers, and all of Hobsbawm’s books on this period (Industry and Empire is still one of my 20 favorite books of all time), and Cry Havoc, and Keohane’s After Hegemony, and Wallerstein’s work on World System Theory, and a whole host of other material on this subject. I just think that it is dangerous to ignore what brute force can do, even if it fails, even if it is doomed to fail, because the cost of ignoring it can be profound.

                1. from Mexico

                  James Levy says:

                  Mexico, your blithe dismissal of the fact that the United States can simply destroy any other power on Earth is odd….

                  I just think that it is dangerous to ignore what brute force can do, even if it fails, even if it is doomed to fail, because the cost of ignoring it can be profound.

                  This is pure straw man, because I never said any such thing. Quite the opposite.

                  As Immanuel Wallerstein noted in an article I linked in my rejoinder to Banger yesterday:

                  The problem for everyone in a situation of geopolitical chaos is the high level of anxiety it breeds and the opportunities it offers for destructive folly to prevail. The United States, for example, may no longer be able to win wars, but it can unleash enormous damage to itself and others by imprudent actions.

                  There is no doubt in my mind that many, if not all, neocons are pathological, and as such are fully capable of doing great harm not only to other people but to themselves as well.

              2. from Mexico

                Banger says:

                If I could characterize my basic political position it is that I am an anarchist who believes that a stable and compassionate social democratic state is the best path towards anarchism.

                I know of no other anarchist who shares your definition of “anarchist.” For instance, in another comment thread today you wrote:

                Banger says:

                November 13, 2013 at 8:29 am

                There are some advantages for the national security state that come from the NSA revelations. Now people know they are being watched and will behave themselves. It’s like the cops sitting in the media strip from time to time fully visible to most motorists who cause cars to slow down. Remember, the goal here is to institute global order and stability not to make mass arrests. As long as we act in an orderly and obedient way we’ll be fine.


                Can you name one other known anarchist who is so sanguine about the US’s burgeoning surveillance state?

                1. Banger

                  Again the mentality of the Inquisition here. I’m not saying this is what I like–I most definitely do not like the American cop doing that. Why would you think I approved of that? I don’t get it. Do you think I just organized a demonstration in my community against the Iraq war in order to meet women?

          2. jonboinAR

            Yet Uncle Sam has basically had to leave Afghanistan having spent a fortune, tremendous energy, and lives, just as Ivan (I donno the equivalent nickname), John Bull and Alexander did before him, without changing much of anything about the nature of the place. So, how’s it “different” this time, again?

        3. David Graeber

          You know I didn’t actually say military power was the only thing supporting US hegemony. I said US military power created a kind of symbolic sense of cosmic power which might be said to be what holds the financial system in place at any given moment. Those are two different levels of structural causality you’re talking about here!

    3. Fiver


      The UK would’ve gone under decades ago but for the perceived ultimate backstop of US power – which allows London to play perpetual banker to the weak. Try to get away with a CB balance sheet like that in the great majority of the world’s nations and it’d be kiss your ass good-bye time – the IMF would arrive to scrape up the mess just minutes before the first “new government” is installed to open the palace gates.

    1. Yves Smith Post author

      No, reading comprehension fail.

      Most of our trade partners are mercantilist and want to run trade surpluses with the US. As long as they want to do so, they need to take our dollars. Period. They could hold that in cash, but they just about universally hold them in Treasuries instead.

      The big surplus countries (China and now Germany) are hectored on a regular basis to stop doing that, but they have taken no major steps towards reducing their surpluses (China has accommodated the US by letting its currency appreciate but has also been aggressively subsidizing investment in higher-value added goods, which is a huge trade agreement violation we’ve not pursued).

      1. jonboinAR

        Could they eventually, if they chose to do so, end up buying up with their zillions of $ much of what’s left of the United States that’s of value such as companies and real estate? Then wouldn’t they end up in a hegemonic position over most of our population as the US and other wealthy nations said to be over relatively impoverished colonial territories?

        1. Ben Johannson

          Congress and the White House block big purchases by foreign entities, particularly China, on a regular basis. Anything they do buy is still subject to US laws and subject to appropriation by our government. When some country nationalized an industry or specific firm, it’s usually one foreign owned.

      2. Fiver

        First, Yves, the day I have a reading comprehension problem with the likes of this piece is the day I happily die. But as you opted to besmirch, I will respond with:

        Nonsense. The “biggest pants” argument belongs in the last century, a rather glaring truth which for some strange reason is incomprehensible to US and Anglosphere economists of a “liberal” bent, but perfectly clear to us on the “left” – maybe it’s the 200 years of Anglo Empire that so confabulates facts of power with facts of economics.

        The US can destroy Iraq, Libya, maybe Iran (or Venezuela) for bucking the buck, but it cannot destroy everyone who wishes to trade with each other in something other than dollars, and last time I checked the US accounted for 10% of global exports and less than 15% of global imports (including services) – those great, big pants are awfully baggy, no?

        In addition, the US no longer provides anything necessary that others cannot produce – just the newest weapons (essentially useless) and that latest medical treatment that buys you another 6 months of “life”…maybe, if you call that livin’.


        It is not only US foreign policy that has ticked off most of the globe – US formulation of financial and trade policy has been every bit as unilateralist, and is perceived as such by pretty much everyone outside the Anglosphere. The desire for a global currency alternative has never been greater due to serial geysers of QE wreaking havoc in much of the world even as it routinely pumps money from the bottom to the top both globally and domestically.

        What Wray says in response to the question he poses is obviously technically true – the US can print itself into a coma if it chooses – but it’s the wrong question. The correct question is: How long will China and the world provide mountains of goods/services more than the US sells back based on its power to manipulate the global reserve currency along with the entire global finance/trade architecture?

        The ability to force neoliberalism on the world has come at the cost of a gigantic defense budget every year for the last 70 years. In return, the US in 2012 gets 9% of total personal income, or $1.4 trillion as a result of all that “liberalized” global trade, at least according to the Peterson Institute. Anyone who believes that income goes to the average working man or woman is daft. So the American taxpayer (or is that borrower?) spends as much on “security”, or rather, the power required to force liberalization, as comes back in the value of “liberalized” trade, value that of course is piped up the ladder for the likes of Peterson to gorge at will.


        When you ask the right question, triumphalist bombast like Wray’s crystallizes in the air and drops like so many debased turdlets. Let’s hope Yellen finally gets what Bernanke clearly wouldn’t.

        1. from Mexico

          You don’t live in the Anglosphere, do you?

          I’ve come to think a lot like you do, but it’s because I live in Latin America and am exposed to many people who don’t buy into Anglo chauvinism.

        1. James Levy

          I’m as skeptical as you are in many ways, but you leave out a few facts: 1) several fairly important countries like Britain, Taiwan, Saudi Arabia, the Gulf States, Israel, and Japan all depend on US military power, military equipment, and/or the dollar for the existence of their current ruling elites, and they act as powerful agents in the global system to keep the dollar “as is”; 2) what currency will all the players accept if they dump the dollar?; 3) what will happen to the dollar-denominated assets of the world’s plutocrats if the dollar goes belly-up, and what will they do to protect the value of those assets? These are real questions, not just idle speculation. The dollar may fall, but to ignore the powerful agencies outside the US whose interests are tied up with the dollar would be a mistake.

  3. craazyboy

    Also too, if the Chinese ever sold their treasury bonds – they’d get paid dollars for them.

    Bet that really messes with their brains!

    1. Clive

      There is an interesting nuance in what you say there craazyboy

      If China wanted to sell a subset of its stock of Treasuries, it could, in theory sell them for Euro denominated bonds (e.g. Germany’s, France’s, even, if it felt lucky, Greece’s**). Or sterling Gilts. Or JGBs. Or whatever.

      But if it wanted to sell *everything* — the whole lot (we’re well into theoretical thought experiment territory here !!!) — then your point comes back into play. The only pool of liquidity of sufficient depth to absorb their entire holding is… more US bonds ! There’s no other game in town.*

      *in theory, the total outstanding Euro debt, JGB (Yen) debt, Gilts (UK pounds) could mop up all the Chinese US bond holdings at today’s exchange rates — assuming that exchange rates didn’t go completely crazy, which they would — but the markets in these instruments simply aren’t liquid enough to accommodate it all except maybe over a period of a decade or more.

      ** (do I get an award for today’s most footnoted comment ? :-) ) I’ll leave readers to mull over just, why, exactly, China is doing this: http://www.bbc.co.uk/news/business-14968688 — the linked to article there flirts with the truth, but manages to miss it.

      1. craazyboy

        haha. That would be a bitch when the Chinese find out they got dollars for the treasuries they sold, and then they have to buy more treasuries with the dollars!

        That’ll make ’em dizzy as a MMTer!

        Maybe they freak out and buy up* all our airports and water supply – then charge us dollars for using that stuff? Might stay ahead of the game that way?**

        *Except however many near zero interest rate treasuries the PBC needs to hold for dollar liquidity reasons.

        ** the PBC needs income on investments to cover operating expenses, and also service sterilization bonds they issue locally to control inflation in China.

        1. Boris Jäggi

          Chinese firms are not allowed to buy interesting or strategic companies/utilities/anything in the US. That is why they have no other option then buying treasuries.

          1. craazyboy


            Treasury Sec? (China is NOT a currency manipulator. Tariffs will stay low)

            President? (China will join the WTO – Bill Clinton, with Chinese campaign contributions)

          2. from Mexico

            The Chinese have, however, began buying up agency debt again in a serious way:

            “China Adds U.S. Mortgage, Agency Bonds”

            Here’s the history in chart form:


            And the Chinese have in the past invested heavily in U.S. shale gas, and now more in shale oil, development:


          3. fajensen

            Alternatively, they could spend their spare USD’s buying all three in Africa and get a compliant government (that can supply a decent amount of mercenaries) thrown in for Free.

            The USD will be spent where it buys the most value, that is NOT inside the US – if one is a foreigner.

            PS: Perhaps some USD will even be spent on stirring up shit inside KSA and Turkey in return for Syria?

      2. jonboinAR

        What about US real estate? Or suppose they bought Amazon.com and Apple? Suppose they just bought Walmart out, thereby eliminating the middleman?

        1. jonboinAR

          I missed Boris Jaggi’s comment. Is this true? I seem to remember that in the past couple of years a Chinese company bought out a struggling US rechargeable battery manufacturer.

  4. profoundlogic

    “The rest of the world are users of the dollar, not issuers. They can never hold us hostage.”

    I just love the smell of American exceptionalism in the morning!

    Will China dump its holdings of U.S. Treasuries? Who knows? What we do know is that while the concepts of MMT are promising, at the end of the day you are really dealing with sociology, not science. They say that economists exist to make weather forecasters look good because economists continue to overestimate their ability to affect a dynamic environment with flawed models and flawed assumptions.

    The rest of the world will be users of the dollar…until they aren’t. At what point that occurs is anybody’s guess. Trust is a funny thing, and more fleeting than many care to acknowledge. What is important is that any attempt to avail ourselves of a “free lunch” is ultimately an exercise in futility. MMT will do nothing to change that.

    1. Ben Johannson

      The world will never stop using USDs. One day it will cease to be the reserve currency, but until something destroys the country its money will be in high demand because it is simply more useful than anyone else’s.

      1) It has a vastly powerful military, making its currency a relatively safe bet as holders of that currency don’t have to worry about it going up in smoke due to an adversary conquering the country. Remember what happened to Confederate money? It became worthless after the North won the war as there was no longer anything to be bought denominated in Confederate Dollars.

      2) The U.S. has a highly productive and diverse economy. You can therefore buy virtually any good or service with its currency. Notice the East African Franc isn’t in much demand because there’s very little you can buy with it; Burkina Faso doesn’t produce much anyone wants so what good does it do to acquire its money?

        1. Ben Johannson

          SDR or an equivalent might become the preferred reserve system, but that doesn’t mean the dollar still won’t be widely used. Japan and the UK, for example have little trouble getting their currency accepted so as to import what they need/want, and they aren’t nearly as productive as we are.

          My personal opinion is holding the reserve currency is more about prestige and bullying others to get what you want in the political sphere. As long as we can import what we want it doesn’t really make much difference.

            1. judabomber

              SDR…that’s funny. You remember your history don’t you skippy? WW2, Bretton Woods and the proposals to have just that? But the surplus country and eventual victor said no? And so now you think the Chinese will suddenly revert to a system that punishes the surplus countries? Hah.

              Or, ask yourself this…in very simplistic terms, what does it mean when the Chinese run perpetual current account surpluses with the U.S.? It means they are exporting their UNEMPLOYMENT to us, while they (gracefully) allow us to import their factors of production. And in that same vein, what is the motus operandi of the CCP? DOMESTIC STABILITY, and by extension JOBS. Who woulda thunk a happy and gainfully employed populous means a stable one. Of course China’s demographic problem – i.e., a rapidly aging population, shrinking labor force and a birth rate well below where it should be could be helpful for their trading partners in the medium to long term. Or maybe not (see Japan).

              For those on the military industrial complex trip above, just remember the scholars such as the late Chalmers Johnson who argued we traded American military hegemony for unfettered access to our consumer market. And it’s become a consumer market that is having difficulty sustaining the world at the current pace of wage and job growth.

              1. skippy

                Hay.. its being discussed at the IMF and America is blocking China’s attempts at more voting power at the table. 10 years maybe…. I don’t have a dog in the hunt, just saying.

      1. profoundlogic

        “The U.S. has a highly productive and diverse economy.”

        Can’t argue with you there. We seem to be extremely adept at engineering and executing frauds on a level which exceeds anything in modern history.

        1. washunate

          Yeah, but commentary on political economy is much less messy if you assume our leaders are responsible public servants rather than fraudulent looters assaulting the republic.

      2. proximity1

        RE: “The world will never stop using USDs.”

        Read more at http://www.nakedcapitalism.com/2013/11/randy-wray-what-if-china-dumps-us-treasury-bonds-paul-krugman-inches-toward-mmt.html#lqLW7pMg6Wgi4LKy.99

        Famous last words. “House values will never fall.”

        “We’re covered. “We have CDO’s.” “We’re covererd. We have CDSs.” “It’s a slam dunk.” “I don’t see any reasonable scenario how we could ever lose even a single dollar.”


        And, finally,

        “The market holds many good values for stock buyers.” (Said with supreme authority and confidence in the same week that the New York Stock exchange crashed in 1929.

      3. Kurt Sperry

        “1) It has a vastly powerful military, making its currency a relatively safe bet as holders of that currency don’t have to worry about it going up in smoke due to an adversary conquering the country. Remember what happened to Confederate money? It became worthless after the North won the war as there was no longer anything to be bought denominated in Confederate Dollars.”

        There is no realistic way the US could ever be “conquered” in a military sense–even if it had a total military the size of say Belgium’s plus a few nukes. The simple geographical realities preclude it. So there is no way the US’ bloated global military can impart “safety” to its currency. This should be trivially obvious.

            1. James Cole

              Not deflationary the same way the credit crisis was, where asset prices fell but prices for consumable goods remained more or less stable or actually inflated, but in nominal terms, yes I suppose it is deflationary.

    2. from Mexico

      I think it’s a mistake to paint all MMTers as “free lunch” MMTers, or what I call “Nixonian” MMTers.

      Take Marshall Auerback for instance. He’s firmly in the MMT camp. But look at his comments I’ve linked above. Does that look like someone in the “free lunch” school?

    1. profoundlogic

      Judging from the labor force participation rate, Americans are increasingly in agreement with you.

    2. Banger

      We could work a lot less but oligarchs fear that we would become less fearful and stressed and therefore harder to control.

  5. financial matters

    During the last Global Financial Crisis the US govt claimed it would bail out money market funds. This prevented the money market run and allowed the repo market to stay open and companies to make payroll.

    This market has the chance to seize up as much as the pension fund story that is beginning in Detroit and will spread to Chicago etc.

    What is being supported here is the financial industry and its unprosecuted fraud at the expense of the real economy.

    Austerity measures are exacerbating the situation by increasing un- and underemployment and increasing income equality.

    Treasuries may be the best game in town but even with military backing they can’t prevent these unfolding problems.

    But I would say that Randy Wray and other MMTers understand this and that is why they favor such things as a living wage (such as doubling minimal wage), programs such as a job guarantee and don’t think that cutting food stamps and social security are the right steps forward.

    And they think that the best way to protect these programs such as social security is to have a well functioning economy which would imply young people having productive jobs and not burdened by excessive school, medical and home debt.

  6. Banger

    A lot of people forget that we are in the process of forging an international system where nation states are moving away from nationalism. In the international system the U.S. is the guarantor of stability. It assures that the sea lanes remain relatively free of pirates and potential rogue states–inter alia, it assures that ruling elites that support the international system can be assured of staying in power through military, police and covert assistance.

    The dollar, as an international currency everyone agrees on, is a great utility for the world and neither China nor anyone else wants to upset the apple cart.

    Having said all that, it is clear that the “international community” (essentially the international oligarchy) is nervous because it is sensing some instability within the U.S. because the social contract appears to be breaking down as shown by the rise of the Tea Party movement. In addition, the world sees a bloated inefficient and corrupt federal government that has failed to produce a decent website for the most important domestic program in decades. I am sure this is ringing alarm bells around the world and I know that many in Washington are thinking about real reform, in part, because they are getting international pressure. The U.S. is still the “essential country” in the world that was the midwife of globalization and remains the chief guarantor of that arrangement that no ruling elite wants to lose.

    Only if there is a general breakdown in the U.S. will China “dump” or destabilize the dollar. It is beginning to hedge its bets and move away from complete dollar hegemony but, as I understand it, they are not interested in undermining the strength of the U.S. Think about it would any country want a mad, chaotic U.S. armed with spectacular amounts of nuclear and other arms (including bio-warfare agents) to go bottom out? Every country in the world wants the U.S. to remain stable.

    1. Moneta

      A lot of people forget that we are in the process of forging an international system where nation states are moving away from nationalism.
      I would change the we “are” with “have been”. The elite are still pushing in that direction but they are now stuck in a game of whack-a-mole.

      The developed world went along with it because a large percentage of the population believed a rising tide would lift all boats. However, the scales are starting to get peeled off many eyes. But many are still clinging to it, thinking that things will be better when the economy bounces back.

      The top 20-30% still believes in this vision because they have gotten richer. In their eyes, the whiners are just jealous lazy losers.

      I believe nationalism will come back with a vengeance. Time will tell I guess. It’s already sprouting in many countries, namely in France… Wait until the social net gets ripped apart and religion comes to the rescue.

      Ahhh… the cycle of life.

      1. from Mexico

        I very much agree.

        The transnational elites may be, as we say in Texas, “fixin’ to reap the whilwind that they’ve sown.”

        Canada, just like Australia, very much runs the risk of falling victim to the resource curse or Dutch disease. The loss of national sovereignty is part of the package that always comes with it. Australia, with its recent election of Tony Abbott, who seems to be 100% bought and paid for by foreign mining interests, is now in heightened danger of succumbing to the curse.

        You might be interested to know that Canadian economists were pioneers in exploring this area of economics.

        The Progressive Economics Forum did a series of posts on what Canadians call it: “staple theory.” Mel Watkins’ classic 1963 article: “A Staple Theory of Economic Growth,” was one of the seminal publicaitons in this area.

        The introductory blog post can be found here, and the other posts under the “Recent Blog Posts” heading on the right-hand side of the screen:


        Great stuff!

        1. Moneta

          I think Quebec is starting to get it but the ROC less. Especially Alberta.

          I was excited when the Qc students revolted because I am putting a lot of hope on Qc. I want to believe Qc will be the instigator of change.

          I can’t wait for real estate to tank here in Canada because I want Quebec to point the fingers at Toronto and Ottawa, the banking central full of Anglos and Neocons who took them for a ride.

      2. Banger

        Nationalism is usually a unifying force that urges citizens to pull together for a common purpose despite surface differences. What you are talking about is ethnic chauvinism that leads to a weakening of the state apparatus and cohesion of the nation. So I see the rise of right-wing populism as a movement back toward feudalism not nationalism as we knew it starting in the seventeenth century up until the post WWII when it started to lose the imagination of the mind and the heart.

    2. taunger

      Dude, really? The Tea Party and healthcare.gov are giving foreign nations the willies? Not post-9/11 militarism, disenfranchisement, and clear abuse of the rule of law from petty crime to multi-national control fraud? Not foreign strike and psy ops run by an unaccountable military/intelligence sector that shows little strategic sensibility? Not the slow disintegration of what was long billed the greatest middle class EVER!

      You seem quite willing to follow the bouncing ball in this great late-Empire sing-a-long.

      1. Banger

        The ruling elites of most countries are fully prepared to live with U.S. militarism and have since the end of WWII. Most of these people see it a nice utility to keep order, keep ME oil flowing and keep trade routes open and so on. The people of these counties probably feel differently but so far I don’t think those feelings are clear.

        Having said that,, the elites of BRICS counties and others in places like S. America may be more alarmed by spying than the Europeans but that remains to be seen–certainly Rousseff has been pretty upset.

  7. PaulW

    It’s good to know counterfeiting is here to stay and I can go plant another money tree in my back yard. Reassuring to know that if one has enough guns then nothing can go wrong. Reassuring for the group with the biggest guns, anyway.

    I have but one reservation: a poster made the point America will always be in demand because it produces what everyone wants. But what exactly does the USA now produce besides military hardware? Fast food burgers? Financial fraud? In the end, doesn’t the world reach the point it realises America’s greatest export is green paper? I did like the idea of the Fed just printing even more and giving it to average Americans then everyone can stop working and happy days are here again! Let’s run with that one for a while.

    Luckily the elites who run every other country are content to keep the Great American Counterfeiting Scheme going because they all profit from the system. Thus you have puppet states, like Canada, which will never rock the boat. It’s a great scheme for the 1%. Just have to keep the other 99% apathetic.

    The problem is that those in charge share two qualities: One, they are as visionary as Louis XVI and his cabinet. If only they could see past the nearest 5 star restaurant and hotel. Ah but when the middle class is destroyed we’ll just let them eat green paper. Two, they are total incompetents. They run a system they control completely yet they still screw it up – as in 2008.

    I do love the idea of an elite class endlessly shuffling paper while the rest of us are content watching tv or the internet. But is that kind of productivity actually sustainable in a real economy? I do hope so as this money printing idea could really catch on and become all the rage!

    1. Paul


      The USA is a massive exporter of a huge range of goods. It may have a falling share of total global exports but that is hardly surprising. American goods that I (UK based) have made use of in the last week alone include; Aircraft, car, microprocessors, telecoms equipment of various types, my food mixer, medicine, various food products and most likely oil in various forms.

      You think USA is exporting less and with less variety than 10 years ago? I don’t think so.

  8. jfleni

    “Think about it would any country want a mad, chaotic U.S….”

    It would be chaotic and mad just as long as it took for the Navy to MINE the ports of LA and Long Beach; then the plutocrats would have to do the work here or go broke. And our exports (from other ports) would go way up.

    Any way you look at it, our destiny is in our own hands if we want it to be.

  9. washunate

    “If the Chinese suddenly decided to stop lending those scare dollars, Uncle Sam would be forced to default.”

    Professor, that’s not the claim. No one believes the USFG will default. No one thinks that deficits are a short-term problem.

    Rather, the issues are the purchasing power of the currency and the concentration of wealth and power. This is the real concern: “Uncle Sam would be forced to print dollars to pay for the national security state and corporate welfare and tax cuts for the rich and the drug war…”

    That’s where the debate needs to be – why have prices risen so much in the US over the past couple decades even as wages have stagnated?

  10. susan the other

    Leaves me wondering anew why trade is even important. In a world that has already decided against growth because it is too dangerous to load up the planet with more CO2. And then that raises the next question, Why do we value “productivity” – it is our nemesis. Then on to why not lots of local self-sufficient economies; and then full circle back to, Tell me again why we even need trade at all.

  11. Hugh

    The value of the dollar ultimately stems not from American guns but from the value of American labor. The real threat to the dollar comes from kleptocrats stealing the wages of and investment in American labor.

    And seriously, who cares what Krugman thinks or what he is inching toward? We have seen this movie a thousand times. Next week, he will go back to spouting some neoliberal line or waving his finger at those crazy Republicans.

  12. craazyman

    “Can anyone, please, explain to me how the sovereign issuer of the US dollar—Uncle Sam—could ever run out of his supply of dollars? Please, give me one coherent explanation of how that could happen.”

    What if the govermint ends up owing so much money it can’t afford to buy the paper to print dollars on anymore? That might do it.

    When everybody is getting tatoos, buying guns and doing pankration, it’s hard to know just when we’ll hit the breaking point but when we do it’ll be hard to use a dollar to buy a ticket to get on the bus.

    1. Steven Greenberg

      “What if the govermint ends up owing so much money it can’t afford to buy the paper to print dollars on anymore?”

      You don’t really believe that the majority of USD money is printed on paper, do you?

      Maybe if the government ran out of the electricity to power the computer to make the book entry of more dollars, there could be a problem.

      What most commenters fail to get is that the Chinese could trade their treasuries for anything else they were willing to trade them for with a willing buyer, but that buyer would not be the US Treasury. The only thing the Chinese can get from the U.S. Treasury is USD money or more Treasury securities.

      Do you have a plausible explanation for how the Chinese could get anything from the U.S. Treasury that was not either USD money or more treasuries?

      Also remember that the Chinese cannot turn in their U.S. Treauries and demand USD money anytime before the Treasuries that they hold become due.

      1. Moneta

        Imagine if the Chinese can’t use their treasuries for anything, ending up working for free for a couple of decades.

        I am debating whether they would be angry or just shrug their shoulders and say whatever, let’s do this for another couple of decades. Those soccer moms really need those valentine, st-patty’s, easter, summer gnomes, halloween decorations at the dollar store. I nearly forgot the loot bags!

        1. PJames

          “Imagine if the Chinese can’t use their treasuries for anything, ending up working for free for a couple of decades.”

          It’s not the workers that hold treasuries as a result of the Chinese trade surplus, it’s mainly the central bank. The workers get paid in renminbi. They don’t work for free. The central bank prints renminbi to buy dollars and puts those dollars into treasuries.

          1. Moneta

            And you just admitted they are not getting fully compensated because for some reason, the money is still staying at the top.

            Why is that? Because they are not ready to switch from a mercantilist economy to a consumer one or because of other power plays?

      2. Moneta

        Well if they show up with US dollars, they can buy oil and resources. And they could say we’ll pay 200$ per barrel…we can’t use our money for anything else anyways.

        Maybe that’s one good reason why the US is so keen on drilling…

        When you start printing, you devalue. Devaluation usually leads to a decline in trust. A decline in trust leads to hoarding. And people usually hoard important stuff like resources,

      3. craazyman

        if they mint the trillion dollar coin it’ll all be on one round piece of platinum the size of a kwatah. LOL

        the way I see it, money is a call option on cooperation with an uncertain expiration date.

        the only real existential risk is that Americans will find some other medium of exchange to use when conducting business with ourselves. then the dollah would be toast, but not French Toast, burnt toast. it’s hard to see that happening any time soon, but it was hard to see the temple at Jerusalem destroyed, as Jesus prophesized it would be, but it was. The ideas of conflict were in the air, solid and seething, and Jesus of course saw those ideas like a Big Screen Movie in His Mind. so it’s not all that surprising what happened if you could see the ideas in your mind.

        The dawlah could theoretically go the way of the confederate currency after the civil war. it’s not like all the people in the south disappeared (except for the deaths in the battles) or that the trees disappeared or that the ground disappeared or that the horses and cows and chickens disappeared. they were all still there. in fact, everything was still there, all the rocks and the trees and all the people who survived and all the dirt and the grass, none of it moved anywhere.

        they only thing that wasn’t there any more was an idea of order, an idea of cooperation around the confederate currency. the idea itself was destroyed and so the currency that embodied the idea was destroyed.

        it may be someday that the idea of the dollar becomes destroyed and then it won’t matter how many somebody has. I suspect China will have sold by then, mostly. If the govermint prints enough dollahs that don’t do anything and just erode the integrity of cooperational structures and make people take up hobbies like tattoos and prostitution and fighting with their fingernails gouging each other’s eyes, then the dollar might be destroyed because the structures that make it worth something would be destroyed.

        Figuring all this out is a little like figuring out artistic perspective. it’s not a matter of determining the mathematics of Newtonian forces as they effect the movement of particles, it’s a matter of figuring out the assemblage and inter-relationship of group-psychological-energetic structures as they effect the depiction and organization of cooperational reality. Nobody understands this but me because they don’t ride the bus like I do. hahahah

        1. JTFaraday

          LOL! And you’re right– only someone who takes mass transit on a regular basis, and has been caught in a few colossal transit emergencies, can understand how important cooperation is.

          I realized this during some major technical eff-up in Manhattan in the 90s. I can’t remember exactly what it was but it involved the Path train, which I didn’t usually take.

          I think the Lincoln tunnel was blocked and the only way to get to NJ was to take the Path to Newark and get the train there.

          I was amazed at how orderly everyone was, hordes of rerouted people stuck underground, patiently trying to get through those little turnstiles so they could go home and get some sleep before they turned around and subjected themselves to the same crap again the next day.

          Even more amazing, of course, most of us learned what to do from the crowd, even though we’d become part of the crowd inhibiting their own progress home.

          Astounding. But what if, instead of cooperating, a critical mass of people had picked that day to decide they’d had enough? What then?

          Thus, at the end of the day, the primacy of the political.

          1. jonboinAR

            Mortgages, credit card bills, hospital bills, soccer league dues, these and the anxiety they engendered gave the crowd the discipline needed to board the train in an orderly manner.

              1. JTFaraday

                Well, after I shut down my computer last night I realized that wasn’t a very cooperative response. Of course you don’t take mass transit– you live in Arkansas.

                A lot of academics don’t take mass transit either, so let me put it a different way.

                Some people will, say, read Karl Polanyi’s The Great Transformation where he discusses the breakdown of the international gold standard and decide that the problem was the rigidities of the gold standard, thus the need for a better technical solution.

                Their understanding will end there.

                Other people will read it and see that while he discusses the rigidities of the gold standard, what he’s actually saying is that the gold standard worked until it didn’t.

                What made the gold standard inoperable was the breakdown in diplomatic relations that smoothed out the technical glitches in the monetary system of the day. These glitches, not having been met by the usual political resolution, then fed into the politics and furthered political breakdown.

                They didn’t necessarily see this coming in advance.

                I would find rather dubious any contention that there is a technically flawless monetary system that doesn’t in the end rely on diplomatic relations, on a functional international and domestic politics.

  13. Fíréan

    JPMorgan’s #AskJPM Twitter Q&A is going horribly wrong. . . but it’s highly amusing.
    Not a reply to a posting in links here but well worth passinbg on for the amusment content.

  14. Chauncey Gardiner

    Thank you for this thought-provoking article However, I disagree with Mr. Wray’s final sentence. I believe that China could exploit vulnerabilities in the Anglo-American financial system to severely destabilize the status quo monetary system if they were intentional about it and employed a Bruce Lee strategy (… “Be water, my friend”).

    Consider the broader implications of what occurred in June when SHIBOR rates spiked to 26 percent in the overnight market due to illiquidity in China’s shadow banking system. Turned out that Chinese entities own a lot of assets around the world that needed to be liquidated to meet their domestic commitments.

    The resultant liquidation pressures coupled with maladjustments in asset valuations stemming from Western central banks’ monetary policies over the past several years in turn threatened to cause a derivatives meltdown.

    Despite some political opposition, the PBC injected liquidity into China’s banking system to reverse the trend. But the incident pointed to an Achilles heel of the global status quo IMO.

    Of course, why would China choose such a strategy?…

    It’s a MAD, MAD world… and there is little room for the arrogantly ignorant. The world is a complicated place. Black Swans fly, depth of contingency planning is important, and a superior military force can be neutralized.

  15. Charles Yaker

    Not sure I follow Yves’ comment about Japan but then again not many people either know of or agree with Eamon Fingleton re Japan that what you see and read is not what is really going on. Further according to Fingleton ” In the Jaws of the Dragon” China is providing us the same false story to their gain and our detriment. We may have all the dollars we want or need but we are giving away our leadership in technology even in industries Mosler believes are necessary for our self defense. Got to wonder if we ever fight China how sure are we that our military hardware and technology will not stop dead because the real Manchurian Candidate is the chip controlling out drones and other technologies.


  16. James Webster

    Lets clarify something we need China and China no longer needs us. If you assume that 75 million people are middle class in the U.S. and China needs us now compared to the now 300 million new middle class math would indicate they will grow better from thier own domestic economy. In 2009 less than 1% of world currency swap was done in juan and in less than 4 years its now 17%. It is also no secret that our currency is causing inflation in every country. You dont need to be a rocket scientist to figure the world needs some other global currency that is fare to all. The East nations commonly referred to BRICS are positioning for a new gold standard. It is going to happen. The COMEX will not exist soon and gold will bounce from 1200 to 3000 over night and my guess reach 8000 an oz. At that rate China could write off what we owe. If the rumor is true that the U.S. has no gold we are in serious trouble. If the 8000 ton is true we still have banks too big to jail that pocess 160 trillion in derivative swaps that will surely go south. China wins no matter how you look at it.

  17. Ziad K Abdelnour

    The Federal Reserve was formed to promote sustainable economic growth by: stability of prices to help preserve the purchasing power of the dollar, moderate long-term interest rates, ensure high levels of employment, and overall, make sure the U.S. has a sound banking system and healthy economy. It is clear that the Fed is not delivering on these objectives today.

Comments are closed.