Like Ezra Klein, I am concerned about the possibility of continued manufactured crises.

The most honest man in Washington did some more truth-telling on CNBC last night. Speaking to Larry Kudlow, Mitch McConnell made perfectly clear that the hostage situation we just went through wasn’t a one-shot deal. It’s the new normal . . .

Previously, I’ve compared the debt ceiling to a bomb ticking away at the base of the economy. We don’t much notice it because it’s always been there and, despite a couple of close calls, it’s never gone off. But that doesn’t mean it won’t ever go off. Particularly if these sorts of showdowns become the norm.

This is the type of thing that should encourage banks and governments around the world to intensify the search for an alternative to the dollar and US Treasuries.

Right now there is no practical way to do this, there is no viable alternative reserve currency and there is no issuing authority that can provide a bond market deep enough and liquid enough to replace Treasuries.

However, I would be looking at this point to see what could be done with some sort International Currency basket and bonds issued by the People’s Republic of China. China does not have to be  a net debtor to do make this happen. It simply has to be willing to facilitate the issuance of a larger amount of state backed debt, presumably offset by holding a large amount of state owned assets. They have proven willing and adept at holding a large sovereign wealth fund.

I would be looking to China, not Germany for several reasons.

1) Germany is just not big enough.

2) Germany is still hooked up to the Euro mess

3) Germany like the United States is a democracy and this type of crisis calls into question the credit worthiness of democracies generally. What reason is there to think that 25 years down the road Germany will not be facing a similar manufactured crisis by its political structure.

At this point Democracy is increasingly looking like a liability in terms of being able to support the international financial system. China’s ability to respond with an extremely strong counter-cyclical policy sharply raises my confidence in the system.

The issue with non-democracies is always revolution risk. China of course has that. However, we you compare it to gridlock risk, I am not sure that revolution risk is clearly and obviously worse.

In any case, you want a viable long run alternative to the dollar and right now this is the only place that has promise over a 20 year horizon or so. It would of course take an enormous amount of time to facilitate a smooth international conversion, but count me among the parties now interested in making this happen.

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