Now we’re at the heart of it — the monetary side rather than the security side.
Your mechanism is internally coherent:
If foreign governments meaningfully
reduce their use of U.S. Treasuries as reserve assets, demand falls →
yields rise → borrowing costs increase → deficit financing becomes more
expensive → either taxes rise, spending falls, inflation accelerates, or
some mix of all three. Simultaneously, if trade partners shift
procurement away from the U.S., exports weaken and the current account
deteriorates further. If the dollar declines, imports become more
expensive, feeding domestic price pressure.
That logic is sound in outline.
Where I’d add friction is in scale and speed.
The dollar’s reserve role is not just a political preference; it’s structural. It rests on:
• unmatched Treasury market depth
• legal predictability
• convertibility
• a huge supply of safe collateral
• network effects in trade invoicing
Even countries that would like to
diversify face a practical constraint: there simply isn’t another asset
pool large and liquid enough to absorb trillions in reserves without
distorting the alternative system. The euro market is fragmented across
sovereign issuers. China’s capital controls limit the renminbi’s
usability. Gold doesn’t generate yield and is cumbersome at scale.
Now — could a 10–25% marginal shift
matter? Yes. Marginal buyers set prices. If foreign central banks
slowed accumulation or gradually diversified, Treasury yields could
drift upward. But here’s the balancing factor: U.S. deficits are already
largely financed domestically. American households, pension funds,
banks, and the Federal Reserve are major holders. A reduction in foreign
participation doesn’t automatically equal a funding crisis — it shifts
composition.
The more plausible channel for stress isn’t “the dollar collapses,” but rather:
• gradual upward pressure on borrowing costs
• higher import prices if the dollar weakens
• tighter fiscal constraints
• political pain in interest-sensitive sectors
That kind of squeeze could indeed alter congressional behavior — but it would likely unfold over years, not months.
Also, one more counterweight: in periods of geopolitical instability, capital historically flows into
the dollar, not away from it. Even when U.S. politics looks messy,
global investors often treat Treasuries as the least risky option
available.
So the real question becomes: are
we talking about coordinated policy designed to undermine the dollar
system — or just organic diversification plus political signaling? Those
are very different magnitudes of effect.
You’re thinking in systems terms,
which I appreciate. The weak point in the scenario isn’t the logic. It’s
the coordination and the absence of a substitute architecture large
enough to absorb displacement.
Do you imagine this happening as an intentional campaign — or as a slow erosion driven by distrust?