An official from the People’s Bank of China made a statement on Thursday that was mostly overlooked in America.
“The United States cannot force foreign governments to increase their holdings of Treasuries,” Zhu said, according to an audio recording of his remarks. “Double the holdings? It is definitely impossible.”
“The U.S. current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the U.S. is supplying fewer dollars to the rest of the world,” he added.
“The world does not have so much money to buy more U.S. Treasuries.”
What Zhu is talking about is a moment when an unsustainable financial system reaches its logical conclusion. It’s one of those extremely rare times in history when the power dynamics of the entire world change.
What Zhu is talking about is the end of Bretton Woods II.
The world economy functions on a dollar standard. The idea is this:
1) America purchases manufactured goods and energy from overseas with dollars it borrows into existence.
2) Exporting nations, to keep their currencies from appreciating, then send those dollars back to America by buying our newly created debts.
3) Those exporting nations then use the surplus dollars to pay for trade with other nations.
This system requires America to run both a large trade deficit, and a large federal budget deficit. In the short-term this systems seems to make sense, but in the long-term it is hopelessly flawed.
Because of interest payments this system requires America to go deeper into debt at an ever faster rate. We must borrow to pay interest on past debt. Some may recognize this condition in a different context: a ponzi scheme.