Get out while you can: why the U.S. dollar is doomed.

• Author: Moller, Jorgen Orstrom

A reserve currency grows out of the strongest, largest, and most dynamic national economy spreading its wings over the global financial market. This is how the British pound sterling worked before 1914 and it is how the U.S. dollar has worked since 1945.

Other countries were ready to accumulate pounds and later dollars because they constituted a claim on British or American production or opened the door to invest in their companies. These two countries were in the respective periods--the biggest economies with products in demand, envied by the rest of the world. Until about 1960, the key term in international economics was "dollar shortage." There was no hesitation in accumulating dollars because they were not hanging suspended in free air, but anchored in the real U.S. economy.

What happened to the United States over the last two or three decades (and to Britain after 1918) was a decoupling from the real economy. The rest of the world no longer wanted to buy American production, resulting in a high, persistent, and growing deficit in the balance of payments, and the incentive to buy American production was overshadowed by the drive of U.S. industry to invest abroad.

Even if the U.S. economy had lost its lure, foreigners might still be tempted to hold dollars if they were looked upon as some kind of global legal tender perceived in the sense of a generally accepted vehicle for settling payments.

For that to be the case, there needs to be confidence in a stable purchasing power. Nobody wants to accumulate a currency if they fear that some years down the road the purchasing power will deliver a smaller amount of goods and services than originally available.

U.S. economic policy has undermined that confidence. At the beginning of 2010, U.S. foreign debt is the same size as U.S. GDP. Even worse, total debt run up by U.S. private, business, and public sectors over the fat years amounts to almost 400 percent of GDR Net interest on public debt accounts for approximately 7 percent of the federal budget, and according to optimistic forecasts will rise to approximately 20 percent in 2020. It seems almost inconceivable that a debt of that magnitude can be sustained. This leaves three options. The first is to service the debt by raising taxes, resulting in sluggish economic growth. The second is to introduce a levy on the yield flowing from Treasury bonds, hurting--deliberately--the creditors. The third is to print money, asking inflation to do the...