Explain Like I'm Five

US hegemony across the globe is largely predicated on the dollar as the world reserve currency, and although it isn't backed by anything, except maybe violence, I suspect that historians will eventually agree the real damage Trump has done to the American empire is that he's permanently shaken everyone's perception of the US as a stable world power.

But also from a purely Forex standpoint, the carry trade in Japan is going to force issues onto the USD in the near future. This might just be that.

I’ll try the “like I’m five” variant. I’m not great at it, and making it five-year-old-friendly means saying some things that aren’t strictly true for simplicity, so go easy on me:

You know how you have coins? That are made of real metal? It used to be that we used metal as money, because metal has uses — if you have some gold, you can make a ring, or some foil to protect a spaceship.

But there just isn’t as much gold or silver as you would need to represent all the things in the world. You need enough money to be able to trade everything, including the gold and silver themselves, and there’s only so much gold and silver in the ground.

So we made a new idea. Money would be based on debt. When you spend a dollar, that dollar is backed by debt that our government holds — you have a piece of paper that says you have a little tiny piece of the US debt that you own, and you can trade it.

But that debt is only as valuable as the person who owes it. If the government decides it doesn’t want to pay its debts, the paper you have is worthless. Treasury bills are a special kind of money, where you can loan the government money and they give you more back at the end. It’s like if you give me $5, and I promise you I’ll pay you back $6 next week. You can trade it to your friend for a baseball card, and they can bring me our contract and I’ll give them the $6 instead.

The more of these Treasury Bills people buy, the more money we have. When you give me the $5, I can buy us some chicken nuggets today, even though my payday isn’t until Friday. But if people stop buying my bills, I have trouble! The less people buy them, the less they are worth, and the less they are worth, the more I have to sell to cover my debts. And that is what we use a lot of our treasury income for — rolling forward existing loans. Say I owe you $12 from our earlier deal, where I borrowed $5 but pay back $6. I only have $7, so I can pay off one bill for $6, but for the other $6, I’d like to sell you another $5 bill and then pay you back with your own money. But if you don’t want to buy my bill, I won’t have money to pay you back.

And that’s what’s scary for people — if there isn’t enough new money coming in to pay the old debts, what will we do?

China sells their exports and gets paid in dollars. They use those dollars to buy US govt debt to get paid interest.

If there is no market for US debt, because countries don't like the Trump volatility, the interest the US has to pay increases.

At current rates the US spends more on interest than its annual military budget.

It could get a lot worse. Especially if the dollar continues to be devalued.

I can't speak to the sell-off, but I have a lot less faith in the USD's future as de facto world currency now than I had two years ago. Trump is antagonizing everyone, and we elected him twice, so they know it wasn't a fluke.

I wouldn't be the slightest bit surprised if the Euro gradually takes over as world currency within the next couple of decades.

Hmm, that might actually be part of the reason for the sell-off. With the tariffs, China is shifting focus to other markets than the US.

Usually, countries and companies will buy govt bonds because those are safe, long term investments. Selling the bonds means they don't trust the investment is safe, that is, they don't think the govt will pay them back (default), or that interest rates will remain higher than inflation.

Suppose a country goes through large price inflation, like 15% a year, while interest is only 5% a year. The bonds will have lost 10% total value. Right now, USA inflation and interest are at ~2.7% and ~3.7-4.2% respectively, so bonds are still profitable.

USA has been allowed to roleplay as world police using other people's borrowed money to supplement oil revenue to pay for their army.

China's push toward electrification & USA's recent self-goals undermine the world order that USA has been perched on top of since WWII.

If the rest of the world collectively decides they've had enough of USA's bullshit, they can just choose to stop lending money for nonsense like a dozen aircraft carriers full of F-35's.

Among the consequences of living in such a world, is the various regional hegemonies would need to arm themselves to police their own backyards. Pakistan and India. Saudi Arabia, UAE and Iran. Russia and EU. If they all got a cut of the global military production that today arms USA, would they use it against each other?

It means they no longer believe the USD is stable.

China is a big reason the USD is the global reserve currency. And if they decide it's not anymore, it's pretty much not anymore.

Trump starts shit with the number one monetary institution in the US because he wants to control monetary policy.

Look at Turkey to see how that went andg then think about what you woulds do if you held a lot of USD backed assets.

Sell sell sell!

Sounds like the perfect thing to turn trumps base against him as a result I'm not worried. If china sells them they will start to lose value and when that happens trump will have to explain away why the US dollar is losing value. It will hurt us all but it will hurt those with money far worse.

China has been cutting them for years, it's not as worrying as it used to be. Once upon a time they held the majority of bonds, but that's no longer the case.