"Every perception is to some degree an act of creation, and every act of memory is to some degree an act of imagination."
-- Gerald Edelman, Second Nature: Brain Science and Human Knowledge
3 The Capital War5 The Capital WarThe Capital WarChapter 7: US-China Relations and Wars2020-10-18Journal
Now, by watching who bought what for what reasons we can understand why. However, the lesson is the same as one regularly gets in the markets, which is that the implausible happens more often than one would expect. So while most everyone, most importantly the world’s greatest experts, agrees that we are testing the limits, no one, including me, should say with certainty that the dollar will be significantly diminished as a reserve currency anytime soon. However, we can recognize what it will look like when it comes and know that, if it comes, it probably won’t be able to be stopped. There will be a selling of dollar-denominated debt by holders of that debt as they put their assets elsewhere and there will be lot of borrowing of dollar debt by smart debtors who will take advantage of that cheap funding to make higher returns and these moves will require the Fed to choose between a) allowing interest rates to rise unacceptably (because that rise would severely damage markets and the economy) and b) printing money to buy a lot of debt, which will further reduce the real value of the dollar and dollar debt. As described in Chapters 2 and 3, it will look like a classic currency defense. As explained in that chapter, when faced with that choice central banks almost always print money, buy the debt, and devalue the currency, which becomes self-reinforcing because the interest rates being received to hold the currency are not high enough to compensate for the depreciating value of the currency. That continues until the currency and real interest rates reach levels that establish new balance of payments levels, which is a fancy way of saying until there is enough forced selling of goods, services, and financial assets, and enough curtailed buying of them by Americans so they can be paid for with less debt.