“We know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.” – Luo Ping, director general, China Banking Regulatory Commission

“Triffin’s Paradox,” the subject of a recent paper from the Council on Foreign Relations, holds that the dollar’s role as the world’s reserve currency means that the United States has to run large deficits in order to supply the world with the currency it demands. The dilemma is that this both weakens the dollar in the long run and makes the United States vulnerable to a sudden dump-the-dollar mood in the global markets, meaning that we’re at risk for a huge spike in the interest rates on the borrowing that finances that big deficit. Put simply: The dollar is so safe it’s dangerous. I like to think that this paradox explains the customary uncomfortable look on Hu Jintao’s face:

“Where my money at?”

The CFR paper describes the situation thus:

Thomas Laubach showed that for each percentage point rise in the projected deficit-to-GDP ratio, longer term interest rates increase by about twenty-five basis points (or 0.25 percent); alternatively, each percentage point rise in the public debt-to-GDP ratio increases long rates by three to four basis points. Combining deficit (or debt) projections with the Laubach analysis, one might expect the fiscal situation to lead to a full percentage point (or even much greater) increase in long rates.

The second domestic factor exerting upward pressure on long rates is that demand from one source—the Federal Reserve—is likely to be scaled back. In 2009, the Fed purchased $300 billion in long-dated treasuries. To the extent this put downward pressure on rates, the cessation of the Fed’s credit-easing policy might be expected to lead to higher long rates.

A third factor on the radar screen is inflation expectations. An increase in inflation expectations can have a one-for-one impact on long-term nominal interest rates. Longer-term inflation expectations have been on a post-crisis upward march, putting yet more upward pressure on long rates.

But interest rates haven’t gone up. The reason for that is, in all likelihood, the eurozone’s sovereign-debt crisis. Everything is stacked against Treasuries and the dollar, but the European situation is so spooky that investors are seeking haven in the United States. For now.

About half of U.S. government bonds (and about a fifth of U.S. corporate bonds) are held by central banks and investors overseas. The CFR paper argues that in 2009 we saw the beginning of what would have been a full-on run on Treasuries, prevented only by the shenanigans of our friends in Athens: “By the autumn of 2009 the scene was set for a wholesale abandonment of U.S. debt markets. But then the eurozone’s crisis accelerated. Spreads between Greek and German long rates skyrocketed, and net bond flows into the euro area fell sharply.”

CFR’s worry is this: Because it is precisely during moments of global crisis that capital tends to pour into the United States, Washington always has ample resources on hand to conduct a robust foreign policy during those emergencies. If we are on the verge of Triffin’s end game and the global capital spigot starts to dry up, the United States government is going to have a hard time financing all of the things it likes to finance.

Unfortunately, we’ve been financing a lot of consumption as opposed to making real capital investments, and our private savings rate is currently about 3.5 percent (and that’s high for us!) so there’s not a whole lot to fall back on.

Even with interest rates very low, interest payments on the national debt are expected to be $248,200,649,741.75 during fiscal year 2010. If rates spiked up to, say, 6 percent, we’d be paying nearly $1 trillion a year ($840 billion) in interest payments alone. If rates rose much above that, we’d be making annual interest payments equal to the ten-year estimated cost of Obamacare — every stinkin’ year.

“That’ll never happen,” some will say. Okay: How much of your own money are you willing to bet on that proposition? That’s the question they’re asking themselves in Beijing at the moment, and there’s no reason to think that their answer this year is going to be the same as their answer in 2009.