Perhaps it’s not relevant to this particular conversation except that few people seem to discuss it and I’d argue if public sector debt is the flu, private sector debt is cancer.
Having said that, I assume the comment about reserve status has to do with the idea that foreign nations might someday stop purchasing our Treasuries and this would somehow lead to a situation where the government could no longer fund its spending.
Even if that were true…
Foreign nations accumulate our dollars because the foreign private sector wishes to sell us stuff to grow their economies and in turn accumulates our dollars. The majority of the foreign private sector needs to deal in local currencies and therefore must trade US dollars back into the local currency (FOREX). If the nation in question sells us more stuff than we sell them, then naturally there is a trade imbalance. That also means there is a currency imbalance (you seem like a pretty smart cookie, so I apologize if this is review).
The logical conclusion of this arrangement would be a strengthening foreign currency (as the demand for it rose relative to supply) and weakening of the US dollar relative to the nation in question. This would cause the cost of foreign goods to rise and would make manufacturing more attractive here.
Of course, you already know that the foreign governments create new local currecy and use them to ensure that there isn’t a currency imbalance. Some would call this currency manipulation.
As you know dollars do not accumulate interest, thus foreign nations can save dollars and lose money to inflation or they can buy US Treasuries. Of course holding US dollars comes with some risk of currency manipulation, thus foreign nations must hold liquid dollars to defend their own currencies should it become necessary.
So, if nations that run large trade deficits stopped buying Treasuries and instead exchanged US dollars for foreign dollars, say, like in China, the glut of US dollars flowing back would result in a strengthening Renminbi against the US dollar.
This would have the effect of increasing prices or foreign/ Chinese goods. This would obviously create a temporary crisis resulting from a shortage of supply here in the US (it would also result in drastic drop in China’s sales to the US), but it would also make manufacturing here at home more cost effective. Thus this move would create a massive demand here at home for which there is inadequate supply. The US response would be to meet that demand by rebuilding America’s manufacturing sector.
Thus, this would hurt most foreign economies that rely on sales to US consumers and would greatly help the US manufacturing sector.
In the end, the need to sell Treasuries to the US foreign sector would decline as dollars going overseas would decline.
In the end, in the short term, the failure by foreign governments to purchase US Treasuries hurts foreign nations just as much as it hurts us here at home. But in the long run, assuming US private sector businesses could meet the demands of the US consumer (and with automation and immigration there’s no reason to think we can’t) I just don’t see the long term problem.