conceptwizard: wrote the following as a comment:
When foreign military spending forced the US balance of payments into deficit and drove the United States off gold in 1971, central banks were left without the traditional asset used to settle payments imbalances. The alternative by default was to invest their subsequent payments inflows in US Treasury bonds, as if these still were “as good as gold.” Central banks now hold $4 trillion of these bonds in their international reserves – land these loans have financed most of the US Government’s domestic budget deficits for over three decades now! Given the fact that about half of US Government discretionary spending is for military operations – including more than 750 foreign military bases and increasingly expensive operations in the oil-producing and transporting countries – the international financial system is organized in a way that finances the Pentagon, along with US buyouts of foreign assets expected to yield much more than the Treasury bonds that foreign central banks hold.
The main political issue confronting the world’s central banks is therefore how to avoid adding yet more dollars to their reserves and thereby financing yet further US deficit spending – including military spending on their borders?
Foreigners see the IMF, World Bank and World Trade Organization as Washington surrogates in a financial system backed by American military bases and aircraft carriers encircling the globe. But this military domination is a vestige of an American empire no longer able to rule by economic strength. US military power is muscle-bound, based more on atomic weaponry and long-distance air strikes than on ground operations, which have become too politically unpopular to mount on any large scale. Jul 05 11:43 PM
David Merkel Wrote in another article:
It is not as if China has free capital markets. Given their neomercantilism (uneconomic export promotion), they had to find places where their exports would be accepted. The answer was the US. After that, what do their banks do with excess dollars? They buy fixed income dollar assets, which they foolishly think will preserve value until they need to liquidate the assets for goods or services of some sort.
That recycling of the current account deficit forced rates lower in the US while the Fed was tightening. For the Fed to have fought that influence, they should have tightened more rapidly, compared to the plodding 1/4% each FOMC meeting. How often have mortgage interest rates fallen while the Fed is tightening? Not often, which is why the Fed was impotent during the last tightening cycle. It is also why the blows hitting the global economy have fallen more lightly on the US. To the extent that foreigners buy our bonds denominated in dollars, that transfers a part of the pain to them. Thanks, but you could have avoided our pain had you opened your markets to our goods and services.
There are many efforts in play to try to replace the dollar. Most if not all will fail. At present, the US is politically secure in ways the other large currencies are not, and many invest in the US not to preserve full value, but to preserve most of the value, whatever that may be.