“All those foreign sovereigns, for instance, who love to invest trillions of dollars of their reserves in Treasuries — it’s easy to see how they might be rather less in love with that idea at the moment, and how they might start wondering if they shouldn’t just take that money and invest it domestically, instead, or in some other country’s debt or equities.”
Ironically, all it takes for the unstoppable increase in US borrowings to be arrested is for China to accept that the hoard it has accumulated all these years is essentially worthless (because the US can just print more of it to pay them), unless it decides to spend it all back in the US. And if China decides to spend their dollars domestically in China, then that ends their peg, and the yuan will then rise vis-a-vis the US dollar.
If ending the peg results in US trade surpluses with China, then there will be less Chinese demand for US treasuries. But the lost demand from China will just be a wash with the less need for borrowings that are due to the deficits from China. But China seems to want to hedge the fall of its dollar holdings by pushing for everyone to shift to the global SDR reserve instead.
I think the Euro is being dragged, German fear of inflation notwithstanding, into the same printing binge as the US dollar. Just look how the EFSF is supposed to prop up the PIIGS. But for how long before the Germans blink and stop the Euro printing (which so far has kept their currency peg with PIIGS) .