This idea of waging financial war on the US seems very en vogue in Europe right now, but I think it's terribly shortsighted. Here's how I think it would go down:
1. EU countries coordinate a mass selloff of US debt, somehow even coercing private holders into a fire sale.
2. US bond prices consequently fall. EU holders lose tons of money on the sell side. US and Asian buyers rush to buy and get a sweetheart deal and massive risk-free returns, which starts crashing the stock market.
3. The Fed intervenes. They conjure up dollars from nothing and buy the bonds EU holders are selling at some discount, maybe 95 cents on the dollar. Those new dollars go into those countries' and banks' Master accounts at the Fed.
4a. EU countries' and banks' Master accounts are frozen. Maybe some portion of the funds are released every week in order to allow an orderly flow of value without too much market distortion. Or maybe given the act of financial war, those funds remain frozen indefinitely.
4b. Alternatively, their Master accounts are not frozen. Now, presumably EU didn't sell all their bonds just to hold non-yielding dollars. So they'll go to the forex markets and buy up Euros, massively strengthening the Euro and fucking up their export-based economies. Maybe they buy gold, or EU sovereign debt, or ECB steps in with mad QE. EU bond yields crater. EU holders lose more money on the buy side as whatever assets they purchase get more expensive. Inflation ensues.
5. US is furious and retaliates with financial warfare of their own. Or perhaps kinetic warfare. The ringleaders of the fire sale end up blindfolded and earmuffed on a US warship.
6. EU is in a much worse position than before, lost a ton of money on each leg, likely had tons more frozen, has pernicious inflation and/or diminished exports, cut off from the dollar system making currency reserve management and forex difficult and costly. The US is also now furious and looking to impose additional costs on EU however and wherever it can.
1. EU countries coordinate a mass selloff of US debt, somehow even coercing private holders into a fire sale.
2. US bond prices consequently fall. EU holders lose tons of money on the sell side. US and Asian buyers rush to buy and get a sweetheart deal and massive risk-free returns, which starts crashing the stock market.
3. The Fed intervenes. They conjure up dollars from nothing and buy the bonds EU holders are selling at some discount, maybe 95 cents on the dollar. Those new dollars go into those countries' and banks' Master accounts at the Fed.
4a. EU countries' and banks' Master accounts are frozen. Maybe some portion of the funds are released every week in order to allow an orderly flow of value without too much market distortion. Or maybe given the act of financial war, those funds remain frozen indefinitely.
4b. Alternatively, their Master accounts are not frozen. Now, presumably EU didn't sell all their bonds just to hold non-yielding dollars. So they'll go to the forex markets and buy up Euros, massively strengthening the Euro and fucking up their export-based economies. Maybe they buy gold, or EU sovereign debt, or ECB steps in with mad QE. EU bond yields crater. EU holders lose more money on the buy side as whatever assets they purchase get more expensive. Inflation ensues.
5. US is furious and retaliates with financial warfare of their own. Or perhaps kinetic warfare. The ringleaders of the fire sale end up blindfolded and earmuffed on a US warship.
6. EU is in a much worse position than before, lost a ton of money on each leg, likely had tons more frozen, has pernicious inflation and/or diminished exports, cut off from the dollar system making currency reserve management and forex difficult and costly. The US is also now furious and looking to impose additional costs on EU however and wherever it can.