Misterno I appreciate your thoughts; we disagree. If the U.S. cannot sell its bonds to private individuals and foreign buyers at auction, it will not matter that the U.S. dollar is reserved currency...it will lose its utility as reserve currency and as domestic currency at the same time. Another form of reserve currency will replace it if that happens. I expect that we will start growing again after a really bad patch and that our longer credit will not fail and we will remain the reserve currency...but it could happen. If you can accept that 'money' is credit (a liability of government) you must rationalize that as credit expands and contracts, it is the true money supply that is expanding and contracting. Neither the Treasury nor the Fed really 'prints' money. Actual printed money in circulation hasn't changed in a decade. Change in money supply is just digits to banks and from banks. The Fed pushes a key and changes its balance sheet to add cash as a liability. Then it transfers the cash to a Treasury account at the Fed where Treasury holds the cash as a credit to its assets, and Treasury issues bonds in a like amount as a liability against its account and tranfers the bonds to the Fed account where they are booked as asset...it all balances out and non of it leaves the Fed...its just changing of balance sheets and accounts. The same thing happens if the assets are being 'bought' from private banks...the differnene is that the transfers take place between the Fed account and the discrete bank account at the Fed...so that the change takes place between the aggregate holdings of the private banks and the Fed...treasuries move to the fed in exchange for a cash liability creation and cash credit moves to the balance sheet of the banks...that takes 2 minutes...that is how money is printed. Do you see that you need viable treasuries to coherently swap for cash notes? If the treasuries have no value, if they are not liquid then the cash note money has no value...so no one will would hold it, reserve or not. Inflation occures when the cash note money moves quickly into private credit formation. This is what economists call 'velocity'...if the new cash moved to the banks becomes leveraged into new private credit then inflation will take place in collateral asset prices in the real economy at the rate that the private credit is created. However, where ther is no demand for private credit creation; where in fact private credit is deleveraging in the aggregate with no net demand for new debt, then there will be no demand for the new cash to flow into. In other words there will be no velocity. The money will not leave the banking system in aggregate and you will see the cash notes build up in the banking system as 'excess reserves' held in deposti at the Fed...so with no demand for private credit the new cash note production simply pools up in the private bank accounts at the Fed...the money never leaves the interbank system and it causes no inflation in the domestic economy. Where banks have excess capital and where they have global bank relationships and where the U.S. cash notes are the international reserve currency, loans can be made internationally where private credit is expanding, where there is a demand for the money or where governments are looking for loans. This is what you seem to be talking about. The excess money not demanded by credit formation in the domestic economy begins flow to other economies where private credit is expanding and then inflation occurs in those economies. That has been what is happening...our wages don't go up, we continue to deleverage and we don't invest in domestic assets which continue to decline, but the things we buy internationally or sell internationally go up in price. The wage earner is screwed by the process that is supposed to be stimulating the U.S. economy but only stimulates some foreign economies.
You have the relationship backwards - as long as the US is the reserve currency, it will be able to sell bonds. (de facto) reserve status will be lost *first*. Then the rest comes tumbling down.
The issue is solvency and that is what shows up in the failed Auction. Its a matter of record that the U.S. can have a bad auction. We just saw Germany have a bad auction. You could say that the bund auction underpins the 'reserve currency' of the Euro within the EMU currency zone. From a practical point of view it happens at the same time; and the point is the idicia of sovereign solvency.
an easy way to think about is you come over to my house and ask for a loan until payday. I go back in the bedroom and run a few C notes off the press and give them to you with the understanding that you will show up on payday with the notes (plus a little vig.) Sure enough, you show up, and I take them and throw them in the fireplace. That's why they say if you do that too much things can get overheated.