Submitted by Joachim Schnabel, Aug 20, 2007 20:15

As I always teach my classes, the quality of paper can be narrowed to the signature and its ability and willingness to honor the contract above the signature. For US Treasury paper, from dollar bills on up, the ability and willingness of the US to enforce the contract in a court of law is paramount. This ultimately becomes a question of superior military power and the willingness to use it. As long as the US is perceived to be the strongest, people will sell things in the US and are content to hold the paper (they'll complain, threaten to withdraw, but they hold). The biggest risk is inflation, but to the extent the US inflates the world, other currencies also inflate, or Gresham's law will work to marginalize them as means of exchange. Gold is another choice, but then you have the problem of slowing your tranactions as well as where to store your gold (back to military). All this shows that winning the current Moslem war is critical.

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