These purchases, made with dollars summoned out of thin air, come with a giant asterisk – they do not derive from organic demand for our debt. They are only sustainable as long as inflation is tolerably low, which it no longer is (in February, it hit a 40-year high of 7.5%).
The exact explanation for the lost appetite among foreigners for U.S. dollars and U.S. debt is hard to pin down. It may have been a delayed reaction from the 2008 crisis, when the Fed made it clear it had the ability to print unlimited dollars to support domestic markets (at the expense of foreigners). It might have been the aggressive sanctions the U.S. instituted against Russian banks after Russia’s invasion of Crimea in 2014 – the most economically powerful nation the U.S. had ever targeted in such a manner.
Previously, sanctions had been reserved for small, economically unimportant nations. At the time, the U.S. threatened to exclude Russia from the SWIFT international transfer system entirely but backed down due to the severity of the measure. Russia took the threat to heart, and its central bank divested most of its U.S. Treasury exposure and set up a SWIFT alternative called SPFS.
Even as the Russians took steps to free themselves from dependence on the dollar system, the U.S. wisely walked back from the brink, realizing that American and European banks were hopelessly intertwined with Russian ones. At the time, President Obama laid out a prescient warning regarding the risk to the dollar system that arbitrary exclusions could pose. In 2015, he cautioned, in the context of unilateral Iran sanctions: