In what has become a four-part series, we are looking at the monetary science of China’s potential strategy to nuke the Treasury bond market. In Part I, we gave a list of reasons why selling dollars would hurt China. In Part II we showed that interest rates, being that the dollar is irredeemable, are not subject to bond vigilantes. In Part III, we took on the Quantity Theory of Money head-on, and showed the counterintuitive property that, the more dollars are out there, the greater the demand.
Now in this essay, we will tie this all together.
You could say it in one sentence: the regime of irredeemable currency has unintended consequences. We often say that we do not prefer the term “unintended consequences” because it puts the emphasis on the alleged intentions of those who perpetrated it. As we discussed in another recent article, John Maynard Keynes’ intentions really were evil.