The underlying assumption that the current world monetary system is built upon is that America will always over-consume and the world will always accept our debt at face value. It’s a warped and unhealthy relationship, but its worked (sort of) for several decades. That’s why it was notable when a Chinese central banker spoke up last week.
“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.”
Impossible? That’s absurd. For decades foreigners have been more than willing to exchange their excess dollars from trade surpluses for our debt in order to keep their currencies at artificially low levels.
It turns out that the problem isn’t foreigner’s willingness to lend to us.
“The US current account deficit is falling as residents’ savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world,” he added. “The world does not have so much money to buy more US Treasuries.”
The problem is that the American middle class is broke and unable to continue to over-consume.