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"There Are Five Times More Claims On Dollars As Dollars In Existence" - Why This Matters
Submitted by Paul Brodsky of Macro Allocation
According to the Fed, there is about $60 trillion of US Dollar credit (claims for US dollars):
Also according to the Fed, there are about $12 trillion US dollars:
So, the data show plainly there are five times as many claims for US dollars as US dollars in existence. Does this matter to investors?
Well, yes, it matters a lot. Not only is there not enough money to repay outstanding debt; the widening gap between credit and money is making it more difficult to service the debt and more difficult for nominal US GDP to grow through further credit extension and debt assumption. Remember, only a dollar can service and repay dollar-denominated debt. Principal and interest payments cannot be made with widgets or labor, only dollars.
This means that future demand and output growth generated through more credit issuance and debt assumption is self-defeating. In fact, it adds to the problem. Credit-generated growth is not growth in real (inflation-adjusted) terms because rising GDP, which engenders an increase in money, is also accompanied by a larger increase in claims on that money. Why larger? Because debt comes with interest.
By definition then, debt compounds while real growth does not. In fact, economies naturally economize because innovation and competition tend to drive prices lower. This natural deflation works against debt service and repayment that needs perpetual inflation.
As we know, for thirty years beginning in the early 1980s the Fed helped the US and global economies grow consistently more or less by reducing interest rates, which gave consumers of goods, services and assets incentive to take on more debt. Following the inevitable debt crisis in 2008, the Fed had to reduce the overnight interest rate it targets to zero percent.
As we also know, to keep the economy growing from there, the Fed then had to begin creating money, which it did through quantitative easing (QE). It bought assets directly from the money center banks it deals with (primary dealers), and paid for them with the newly created money. At the same time, the Fed paid these banks – and continues to pay them - interest on the money they created for them (Interest on Excess Reserves). This provides a disincentive for banks to lend to the public, which is how the Fed is trying to control US growth and inflation today.
The long and the short of this discussion is that either the Fed and other central banks overseeing highly leveraged economies must inflate their money stocks and get the new money into the hands of debtors, or inflate their money stocks and get the new money to creditors. The former would make systemic debt service and repayment easier. The latter would keep creditors solvent when debtors inevitably default. The economic impact of getting new money in the hands of debtors would be significant inflation. The economic impact of creating more bank reserves would be significant economic austerity (a full-blown depression). Why? Because debtors would be increasingly starved of the ability to service and repay debt.
Impact on Assets
Investors might ask themselves how two pools of dollar-denominated assets can be valued collectively at $38 trillion ($19 trillion each for US Treasuries and US equities), when there is only $12 trillion in existence? Not only does this gross imbalance not include the market value of other assets, like other bonds and real estate; it also does not include the value of the US private capital stock, such as inventory, resources, enterprises, and collectibles. (Economists might want to think about this too.)
In short, the value of dollar-denominated assets is not supported by the money with which it is ostensibly valued. This has not been a problem historically because the proportion of un-reserved credit has been low relative to asset values and cash flow. As we are seeing today, however, it is becoming a significant problem because balance sheets are already highly levered and zero-bound interest rates chokes off the incentive to refinance asset prices higher.
If the total value of US denominated assets is, say, $100 trillion, and the US dollar money stock is somewhere around $12 trillion, then the inescapable implication is that the market’s expects either: a) $88 trillion more US dollars will be created in the future to fund the purchase of the gross asset pool at current valuations; b) there has to be a decline in the nominal value of aggregate assets, or; c) both.
Obviously there never has to be a full exchange of assets for money because there will always be asset holders wishing to keep their assets. But that is not the point. The issue is that there is a significant rate of inflation embedded in the currency (clearly higher than 2% targeted by the Fed), and/or a significant rate of deflation embedded in assets.
What forces the issue? Production, or the lack thereof. If/when the value of asset prices exceed the value of production by an amount that disincentives production, GDP will contract.
Warren Buffet is famous for considering the total market capitalization of US equities against GDP. While this Market Cap-to-GDP ratio provides a clue as to how easy or difficult it may be at any point in time for public companies to generate higher revenues and earnings relative to past equity markets, it does not consider the dynamic driving demand for goods and services in the broader economy.
In other words, it does not consider what actually drives GDP. The presumption is that nominal GDP will always grow. This is not necessarily a bad assumption (in fact it is a reasonable one for reasons we will discuss next week), but it does not consider how the pursuit of nominal growth in today’s macro environment will actually reduce real growth and real ROI.
It is that easy. We think there will continue to be an inflationary deleveraging in the US and across the world, and ultimately significant widespread inflation. More on this next week.
Mr. Buffet and most investors have not had to be concerned during the secular leveraging phase with output contraction in real terms, and so they have not had to be concerned with negative real ROIs. Looking forward, we think it is becoming increasingly obvious that wealth and alpha will be created by allocating capital to assets in which price and real value are closely aligned.
Un-levered assets should outperform levered assets. Businesses that sell to less levered consumers should outperform businesses that sell to levered consumers; and so on.
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Only 20% of dollars are real?
The Pareto principle strikes again!
Welcome to the end game of debt based fractional reserve money system...........
So just print more dollars until everybody has enough...right? ;-)
Naturally, NONE of this matters. UNTIL IT DOES.
In a debt based economy there will always be more dollars owed than in existence. That is the nature of the beast because without ongoing credit to stoke sales, growth does not occur.
IMO, it's futile to examine these dynamics because debt saturation combined with asset bubbles leads to insolvency, which is where we are now. You can't expect deleveraging to occur because doing so placed demands on liquidity, which is scarce. So we can observe the problem, but nothing will happen or change until the system collapses.
The Fed's reluctance to raise rates for the last 9 years is proof. The system is debt saturated and on life support.
Well, yes, it matters a lot. Not only is there not enough money to repay outstanding debt;
Oh dear. Not this fallacy again.
It depends on when the debt falls due; interest rates; and monetary velocity. And whether the banks receiving their interest payments are hoarding them or spending them back into the economy, obviously.
Yes, you can create more debt than there is money to pay it back, and still pay it all back, because people don't pay all the debt back at the end of the loan, but in regular increments, some of which gets destroyed as out-of-thin-air principle, and the rest the bank keeps and spends back into the economy, whereby it circulates back to the borrow for him to repay it to the bank. Obviously, if all the debt in existence were to be paid back there'd be no currency, but thta's a different problem.
The current system is only a problem i) if you'd like for your nation not to be beholden to a corrupt, subsidised cartel for its MoE; and ii) if/when monetary velocity drops... which if course, it has.
There has to be some upper limit.
Big Jim gets it right!! This guys argument has a lot of holes in it but the most glaring is that he doesn't take into account the velocity of money. No doubt the current world system of fractional reserve banking of fiat money is unsustainable but this guy got the explanation all fucked up.
Big Jim is onto something.When debt money is being destroyed and the world stock markets lost $13 trillion as investors switch to cash to destroy debt, you have to wonder what the corresponding velocity increase should be to avoid increasing economic slowdown. The gap between where velocity is and where it needs to be to avoid the next GFC (cardiac arrest of the patient on life support) must be massive and growing but Noone is measuring this gap.
Well, Banks can lend 10x more than they actaully have, so, all of your calculations reduced the debt in 50%. What now? there is still 5x more Dollars in debt than in existance. What's your soultion?
Its obvious that the system is problematic. The power of Money Creation CANNOT be given to private institutions. Simple as that.
No way for velocity to keep up. Not enough economy to service the interest......and it will only get worse from here.
Also, all money is debt. Therefore, more debt must be created to pay the debt. Debt/Money is just a means to confiscate real wealth. The parasite has gotten bigger than the host. Won't last much longer.
"It depends on when the debt falls due; interest rates; and monetary velocity. And whether the banks receiving their interest payments are hoarding them or spending them back into the economy, obviously.
Yes, you can create more debt than there is money to pay it back, and still pay it all back, because people don't pay all the debt back at the end of the loan, but in regular increments, some of which gets destroyed as out-of-thin-air principle, and the rest the bank keeps and spends back into the economy, whereby it circulates back to the borrow for him to repay it to the bank. Obviously, if all the debt in existence were to be paid back there'd be no currency, but thta's a different problem.
The current system is only a problem i) if you'd like for your nation not to be beholden to a corrupt, subsidised cartel for its MoE; and ii) if/when monetary velocity drops... which if course, it has."
Your presumption though is that all debt must come from counterfeiting and this is not true. Once upon a time money was loaned, invested, as the means for the borrower to create more value than was loaned. That is, more productive work would have to be performed in order to return possession of the money loaned to its owner.
It was a win/win/win exchange. A win for the lender who invested money to earn money. A win for the borrower who used the money to make money. A win for the 3rd party who traded money for the value produced by the maker of money from the invested money!
Please don't forget there is good debt too and that good debt necessarily is the representation of good actions, i.e., capitalism.
One example would be borrowing saved money instead borrowing created money.
We don't have the same "brand" of capitalism today that we once had. And here is a symptom of that disease: Most of the credit/debt creation today is for non-productive endeavors: Trillions for the Military Industrial Complex, Social Security payments {please don't hand me that SS is self funding bullshit}, other social programs, funding for the world's largest prison system, education system, HUD, FHA, Freddie Mac, Fannie Mae, VA and all the other Federal subsidized home loans that require little if any money down. Not to mention all of these loans that are defaulted on. So what you have, is a good portion of the credit/debt creation going into schemes that do not grow the economy at all. In fact, much of it has the opposite effect.
Bike paths, You left out bike paths. What are you, some kind of wrecker, a terrorist or 'somptn?
I wonder what the oldest instance of this fallacy/meme is on ZH. It was already pretty long in the tooth in Jan 2013 when I had this back-and-forth with sitenine.
And you know this idea is just never going to die, no matter how wrong it is. When 'V' says "ideas are bulletproof", somehow I don't think the viewer is supposed to think about the fact that that statement applies equally well to nearly every wrong idea in existence as it does to right ones. I mean, climate science has brought us back to every really big/bad storm being caused by our sins -- who in their right mind thought that idea was going to make a comeback?
I read that exchange.Two problems:1. If you need to change the current system by buying back the debt, there is never enough money to pay back the interest. This creates an ownership problem because if you pay back all the principal you still owe the debt so when the owners of the interest owed look at the world economy with all principal paid back but debt still owing then that interest (currently in the single digits) wields enough power to own all the assets of the world. Thats what the bankers and their owners think. This will be the point of the fight to transition to a new monetary system.
While I'm all for changing the current system, that was not the topic of discussion, nor was buying back debt.
You do not seem to have understood it. Ability to pay back depends on many things, but there is no single dollar amount that makes it impossible. (At 0% interest, any dollar amount can be paid back - it will just take a long time. Higher interest of course requires higher money velocity if that possibility is to remain. And it is not necessary for that possibility to remain - default is always an option, and creditors are responsible for lending responsibly and deserve to lose their investment when they lend irresponsibly.)
That's just nonsensical. I have assets. I have no debt (not counting government debt). The interactions between creditors and debtors does not mean the creditors get my assets. Either the debtors have enough to pay their debt off, or they do not and they default. Since I still have my assets either way, the creditors do not "own all the assets of the world".
Thank you, finally someone with common sense. Not everyone is going to cash in or spend all of the dollars at one time and people need to remember that many countries of the world do much or most of their main dealings in dollars as people do not trust the local currency. Take care and God bless, respectfully American Warrior
As valuable as the paper they are printed on.
Long paper.
This just highlights what I've been saying for quite some time:
Our future is DEFLATION.
The hyperinflationists are wrong. When this whole thing blows, it will be a Deflationary black hole; there will be a scramble for 'dollars' to service debt; Cash will be King.
(Note: I didn't say 'bank deposits,' I said "Cash" as in FRN's)
Everybody has DEBT, almost nobody has CASH.
We are ALL Japan now.
Plan accordingly.
[Cash, Bonds, Gold...]
And than what happens?
everybody just accepts that they are fodder to be liquidated?
Couldn't an electronic credit pay an electronic debt? No need for FRN in that situation.
Unless you're a Bankster, where will you get that 'electronic credit'?
BTW, the situation is even worse than this article indicates.
There are only about $1.38 Trillion Physical FRN's (along with coins) in existence, and most of them are overseas:
http://www.federalreserve.gov/faqs/currency_12773.htm
So that's more like 43 Times More Claims on FRN's As FRN's in Existence...
[Kinda like 'Paper Gold' ounces to REAL Gold ounces, eh?...]
If FRNs are so in demand, I will reluctantly give 50 of them to anyone in exchange for one pet rock, er, gold eagle that has $50 stamped on it. Any takers?
Most of my bille I pay electronically. My paycheck is deposited electronically. Unless business ( like the electric company, bank that holds my mortgage, phone company ect) all start demanding CA$H, how will this shortage of physical dollars ever show up? I can't imaging all business demanding cash, especially large ones who view it as a hassle.
And this just highlights what all the deflationists do not understand about the inflationists' argument.
The coming hyperinflation will be a result of the central banks responding to the credit collapse you are referring to. Sure, we could have deflation for a few years, a decade or two more perhaps in the extreme, but ultimately the central banks will be forced to hyperinflate to save the member (national) banks.
When that time comes, you will have more than sufficient time to trade FRN's for 'assets.'
Just as wise investors did in the 30's: the holders of FRN's will be able to bargain-shop on assets.
Imagine a majority of American's income streams are cut-off or severely curtailed. How will they service their debt? Where will they get 'Cash' for necessities? Who will be extending 'credit.'
The holders of 'money' (i.e., Cash and Gold) will be in the drivers seat.
This is why the hyperinflationsists will be wrong: there has never been a time in history when debt levels (both public and private) have been so high.
One man's liability is another man's asset. What will happen to the value of that 'asset' when the counterparties can't service their debt?
Answer: Deflationary collapse.
Invest in what's rare (Cash)
Shun what is ubiquitous (debt)
The hyper inflation though makes sense because while the banks can see the problem of too much debt, they cannot actually solve the problem of who is worthy of earning the credit, only the market can decide that.
So we will see more QE, pouring more wealth into the hands of people who do nothing productive to earn it, while at the same time reducing the value of the wealth that was in the hands of the people doing productive things.
This system is wealth destroying, the end result will be hyper inflation because eventually people will find it more profitable to not use the system, the implication meaning that the currency has no value. In theory we should be able to see that coming, even today there is evidence of large scale capital misallocation, but during the Weimar state the lunacy of their policies was obvious, but that did not stop them pushing hard on the accelerator as the car went hurtling over the cliff.
That's the first phase. What comes next is the pop when rivers of conjured cash rushes in to save the system.
This is true insanity.
John Maynard Keynes is T-Bagging us all from the grave.
Got that right. The word "Keynes" itself is a profanity.
He set the foundation for the biggest ponzi scheme ever.
In the long run… he’s dead!
So wait for the inevitable "bank holiday" and watch those "physicals" soar in value.
Oh, the irony.
And so I stack them.
Now comes the other challenge:
Only 20% of the people are going to end up with 80% of that real money...
"So, the data show plainly there are five times as many claims for US dollars as US dollars in existence."
Quick! Alert Obama's Department of Justice!
"Someone's" writing checks their ass can't cash ;-)
Just another manifestation of ponzinomics.
Print it, they will come.
yup
right on Janet Yellens pretty little face.
.
.
.
"Principal and interest payments cannot be made with widgets or labor, only dollars."
Well then, dollars are all you need? No problem. That can be arranged.
Gold and Silver, bitchezzz.
i up'ed you but dont call me bitchezzz, sir...please.
ALL dollars are debt, even those paper ones in "existence". This article is an attempt to generate faith in the dollar ponzi.
exactly, latitude. the entire fiat money scheme is like an orobus: it has no choice but to feed on itself. that is, until there is no more self to consume. it is the heart of bablyonian money magik.
Your right. Dollars arent even real money imagine it, they are promises, not even tied to real money anymore. Good luck having faith in Uncle Sham's promises! Really keep walking towards the edge everything will be just fine.
Problem: Debt underwritten by counterfeiting.
Solution: Debt underwritten from money that already exists.
What's insane is when the financial SHTF for real, there will be a dollar shortage. This means that we will likely see a plunge in nominal hard asset prices when this goes down (before it whipsaws the other way.) To me that's especially fucked up.
good
there is some spider-man comic art I am looking to buy on the cheap!
that is what the deflationists don't get. cash will be king. until his nakedness is noticed. then he'll be abandoned and mocked.
Yep, what will be interesting is to see the real evidence of this occuring, so far we have rumours of heavily manipulated precious metals markets, but the day when governments start regulating the holding of them, or of anything else that is not their fiat currency, then we have proof that the paradym of holding non-fiat is profitable has taken root. 20 years ago it was a safe assumption that a high interest bank account is a good place to store your money, the past 5 years have shown that assumption is wrong, but we are still waiting for the event where people truly accept it and start acting differently in a way that damages the system.
They cannot print their way out of that hole when it finally occurs.
could be worse
the underlying claims on gold are practically to infinity [252x]
the above overlooks several facts:
1) at zirp all debt can be serviced no matter how high it gets. anyone paying debt off is not a goal of the maggots.
2) gubbermint debt can be paid for via the printing press thus increasing M2.
3) defaults and maggot bailouts are to be expected. one simply can't make an omelet without breaking a few eggs.
4) Something cannot come from nothing. The debt slaves will be whipped.
those would be the "eggs" that get broken to make the maggot's soufflé.
There are always more claims to dollars than dollars in existence. This happens under a gold standard as well.
The time duration of debt due is not the same though.
What is true is that credit inflation is necessarily deflationary as the debt is repaid. Just doing what it is you're supposed to do with debt -- paying it off -- is deflationary under a credit money scheme.
What really insane is when a central bank targets inflation. It's attempting to fight what is otherwise a natural fluctuation in the money supply.
“$60 trillion in claims… [against] $12 trillion dollars?”
I can certainly agree with your concern; but, you have assumed far too much.
Dollars? There are several categories of “dollars”; Federal Reserve banknotes, bank reserves, checking and saving deposits, to name a few.
Furthermore your assumption of $100 trillion dollar assets owned by the federal government is inexcusable. Check the latest federal annual report and you’ll find that federal assets amount to about $2.5 trillion – while its liabilities amount to… well you wouldn’t believe it. Let’s just say it’s off the chart.
Furthermore, there is another major consideration that everyone overlooks: who are counterparties behind such “dollars”.
You aren’t qualified to make any decisions without such knowledge; and will invite enormous disasters if you make such decisions… or influence others to do so.
Very good observation. The rapidly escalating federal obligations for entitlements is going to make this way worse in a hurry. But the Fed stands ready with "helicopter money." They will simply credit beneficiaries with "new money" rather than use the debt option (which is rapidly becoming unsustainable).
First off, his estimate of $12 trillion dollars includes deposit accounts and reserves, and it's wrong. The current legal tender money supply stands at $1.38-Trillion in circulation around the globe. That's all the money there is to back the $60-Trillion in debt/credit.
Secondly, there is only one type of 'dollar' and it is defined by law, specifically Section 31 U.S.C. 5103, it's a short paragraph. In it, you will not find the credit generated by the banks or the Federal Reserve listed. In point of fact, there is no law anywhere that grants to either the Federal Reserve or the banks the authority to create money. There is no law anywgere that designates or acknowledges the credit they generate aa being money or even a currency.
All deposit accounts are credited accounts, they are all bank debt. This means that the richest amongst us have exactly the same amount of 'money' in their deposit accounts as the poorest amongst us have in theirs, $0.00. That a bank maintains some 'money' on hand to placate a few requests for the medium, does not negate the fact that all deposit accounts maintain a zero monetary balance. A ledger book entry denoting the amount of 'money' the bank owes to (stole from) the depositor, is not 'money', regardless of your ability to 'spend' that ledger book entry with a debit card. Passing around bank debt from one recipient to another, is not payment for anything. Crediting an account with the amount and actual payment are two different things. When you use a debit card, you're not actually drawing upon anything held in your credited account, you're actually utilizing your bank's line of credit.
People are not the "counterparties behind such “dollars”". There is no debt associated with the legal tender money.
http://carl-random-thoughts.blogspot.com/
the Frog
./ rm
Correct on all counts.
Only the sheeples personal debts matter. No one ever understood my "personal" renunciation of government debt and why I come down so hard on the popular statist meme of "Every American taxpayer owes X..." so much horseshit.
What is a claim?
What is a dollar?
Based on the article, the banks will need to tale an 80% haircut and all will be good.
Oh, wait, there are dollar denominated assets as well. They play some part in this ... ahh, so the bank will claim they own the assets after creating that debt out of thin air.
Something is wrong about that.
The dollar is not denominated assets, it is the money that all asset values, to include Fed and Bankster generated credit, are denominated in.
The Walking Fed.
http://www.sciencedirect.com/science/article/pii/S1057521914001070
The Fed creates fiat dollars from nothing and lends them out at interest, so naturally there is always going to be more outstanding debt than there are dollars. I guess those interest rates have really added up since 1913.
A common misconception.
When a debt is created the dollars are created with it.
When the principle is paid down those dollars are destroyed.
The interest payments are not destroyed, those dollars are transferred into the coffers of the bank. Just to be clear: monies used for interest do not dissappear from existance, only from circulation.
As long as the bank spends those dollars back into the economy (salaries, asset purchases) then those dollars will still be available to pay down principle.
The evil of the system is when the bank uses interest payments to buy real assets, since this is a real wealth transfer to the bank without any productivity on the banks part.
Thanks for the correction.
When debt is created, claims on Dollars are created, not Dollars. Evidence: ammount of outstanding loans is much bigger than currency in circulation and reserves of the banks. The central bank creates Dollars when taking collateral for a central bank loan or buying assets.
Toy Story - Buzz Lightyear - To infinity and Beyond
http://www.youtube.com/watch?v=ejwrxGs_Y_I (0:36)
https://www.youtube.com/watch?v=PGuTN_ilmEk
Fuck that asshole that wrote this article.
The claim on dollars is ALWAYS 5 times more dating back to 1985 according to the chart.
So this is not a recent phenomenon and if it's a bad thing, a crisis would have happened back then and no need to wait until now.
That's only credit. Add stocks to the credit value and at today's valuations the leverage is unprecedented. Then there's all the real estate, collectables, etc...
YEAAAAAAAAH!!
I suppose this problem would be more easilly managed if the velocity wasn't crashing below 1.5, but we may be approaching the end of the music in a game of musical chairs.
From OC sure
Problem: Debt underwritten by counterfeiting.
Solution: Debt underwritten from money that already exists..
Debt underwritten by existing money...that is a Sovereignmoney system. Thanks for putting it so succinctly.
If existing money underwrites debts, then individual savers tend to hold debt instruments, not elite bankers. Bankers are stripped from hypothecation power, they can only loan out other people's money.
www.sovereignmoney.eu
they can only loan out other people's money
Making this remark I am wondering what you actually know of Mefo bills ...?
I may be a dummy but hasn't this been the norm under fractional reserve banking for the past few centuries? Problem only happens when too many asset holders want "settled" like during the great depression. This however is probably on the radar of those "quietly proposing" a cashless society.
Yes, but as with investing, five or six times leverage probably okay. Ten times leverage is a ticking time bomb.
The fed can print 500 million in one hour, 12 billion a day in currency.
It's how hyperinflation will happen'as a rising dollar will wreck the US economy in total.
So the shortage is just a small problem, it's what happens when that problem is solved.
If the total value of US denominated assets is, say, $100 trillion, and the US dollar money stock is somewhere around $12 trillion, then the inescapable implication is that the market’s expects either: a) $88 trillion more US dollars will be created in the future to fund the purchase of the gross asset pool at current valuations ....
... because the market wants to purchase those 100t all at the same time
Right? What a BS... Reminds me of this talking heads nonsense "money is going into the stock market".
"We think there will continue to be an inflationary deleveraging in the US and across the world, and ultimately significant widespread inflation."
So , five times more claims on Dollars as Dollars in existence creates inflation? Deleveraging is Deflationary not Inflationary by defenition.
Not if the Fed uses "helicopter money" to put new cash directly in the consumers' hands. You've seen the past 30 years of Fed policy - what makes you think they won't go there?
NIRP, then Helicopter Money, then Hyperinflation. We know what, we just don't know when.
Money is blood. There is no life if it doesn't flow. How little the elite understand they sow the seeds of their own demise in their greed. It isn't much different from you and I on these comments; Why are we here? insulting the rich with our condescentions all the while addicted to our own fascination of money, is it going up? down? sideways? is it turning over? bifurcating? integrating? or decimating? Go outside and grow some food security. We avoid the tragedies of fiat collapses by securitizing our own local commodities, real, tangible, community wealth, guns and butter.
"the data show plainly there are five times as many claims for US dollars as US dollars in existence"
"Remember, only a dollar can service and repay dollar-denominated debt."
Which only goes to show how stupid the schadenfreude-based claims of the imminent demise of the US dollar truly are.