Is a Dollar Crisis Coming? Problems are lurking everywhere.

• Author: White, William R.

The international monetary system remains dollar-based despite decades of warnings that the central role of the dollar was coming to an end. Some critics pointed to fundamental flaws in what economist Jose Antonio Ocampo has called a (non) system. It provides no automatic adjustment for persistent current account imbalances. It allows for significant, often damaging, policy spillovers from large countries (especially the United States) to smaller ones. There is no nominal anchor for global inflation, and, finally, there is no assured lender of last resort. Implicitly, these critics assumed that a system with such flaws could not long endure. Until now, they have been proven dead wrong.

Other critics pointed to developments that might have been expected, gradually but continuously, to lower confidence in the U.S. dollar as a store of value and as a medium of exchange. As the U.S. share of global GDP has continued to shrink, its capacity to service an ever-growing stock of international debt (the Triffin dilemma) has become increasingly questionable; surely "vendor financing" cannot continue forever? Moreover, concerns have been raised at various times about relatively high inflation in the United States as well as the relative commitment of the U.S. Federal Reserve to resist inflation. Massive increases in the U.S. government deficit and debt have recently raised fears that an excessively bipartisan Congress would lose control. This has led in turn to growing worries about "fiscal dominance" and eventually much higher inflation. Finally, resentment over the repeated use of the U.S. dollar as a geopolitical "weapon" was rising well before the imposition of sanctions on Russia.

Reflecting such arguments, many commentators predicted in 2006-2007 that the U.S. current account deficit would trigger a dollar crisis and then a global financial crisis. While a crisis did arrive, triggered ironically by events in the United States itself, the dollar did not fall but rose. We saw the same phenomenon at the beginning of the Covid pandemic. These developments reflected the dollar's underlying strengths--the size and liquidity of dollar markets, and trust in U.S. institutions and the rule of law.

Perhaps equally important, alternative currencies are not attractive enough. Sovereign debt markets have remained too small in Europe, and too constrained by capital and other controls in China, to ensure needed liquidity. And if the United States has political...