Almost all nations use the USD as their reserve currencies. That means that, to the extent their central banks have USD reserves, the value of their currencies and the risks associated with each nation’s sovereign debt is based on that of the USD and on US sovereign debt. Most nations central banks hold US in the form of US Treasury debt.
Therefore, the correspondence between the interest rates paid on the sovereign debt of the US and other nations simply does not prove what Krugman claims.
Correction: Most nations’ central banks hold USD in the form of US Treasury debt.
Interesting point.
Lets just hope countries just don’t try to trade in other currencies or adopt new standards (B.R.I.C.S). Anyone heard of such instances.