armstrongeconomics.com / By Martin Armstrong / January 30, 2013
There are two distinct trends that we have to divide and conquer to fully understand what we are dealing with (1) Parking capital and (2) Investing Capital
The motives behind each are totally different and this goes in part to also the question of the “reserve” status of the dollar. There is the dollar as a instrument of trade, and then there is the dollar that is PARKED by governments as reserves. If China demands other countries accept its currency and not dollars for trade deals, that has no impact on the “reserve” status that is determined by holding government debt. Such countries can accept their currency and the park it after conversion in US debt. Europe failed to create a national debt and thus the euro will never be a real single currency until that happens. The risks vary far too much with each nation to provide a single risk management. Thus, the vast size of the US National Debt makes it the only game in town for parking huge money. That is different from using dollars, euros, yen, or yuan in settling trades.
There is unquestionably the inevitable revulsion toward sovereign debt on a global scale because governments have been borrowing with no intention of paying anything off. The failure of Europe to create a single debt has barred that currency from ever becoming a reserve currency globally. Politicians live under the delusion that it is less inflationary to borrow than to print. That was true in the 1960s when you could not borrow against government bonds. But after the Bretton Woods System collapsed in 1971, the “reserves” became just dollars and thus money became pure debt that now simply paid interest. You could trade in the markets with TBills as collateral. Suddenly, money and bonds were indistinguishable. What emerged was currency now that paid interest. Hence, the national debts have exploded as the USA debt is nearly 70% composed of previous interest payments. It would have been a hell of a lot cheaper just to print that did not cost interest. The national debt would be 30% of what it is and taxes would not be rising.