>Why on earth not? As long as the dollar plays the role of world money, you'd
>expect demand for dollars to expand roughly in line with world trade. So
>yes, the US can run big current-account deficits forever, just the way
>gold-exporting countries could under the gold standard. In fact, it has
>to -- this is what's called Triffin's dilemma, I think.
According to the IMF's summary <http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm> Triffin's dilemma, appropriately enough, had two contractory parts:
>If the United States stopped running balance of payments deficits,
>the international community would lose its largest source of
>additions to reserves. The resulting shortage of liquidity could
>pull the world economy into a contractionary spiral, leading to
>instability.
>
>[but]
>
>If U.S. deficits continued, a steady stream of dollars would
>continue to fuel world economic growth. However, excessive U.S.
>deficits (dollar glut) would erode confidence in the value of the
>U.S. dollar. Without confidence in the dollar, it would no longer be
>accepted as the world's reserve currency. The fixed exchange rate
>system could break down, leading to instability.
>Triffin's Solution
>
>Triffin proposed the creation of new reserve units. These units
>would not depend on gold or currencies, but would add to the world's
>total liquidity. Creating such a new reserve would allow the United
>States to reduce its balance of payments deficits, while still
>allowing for global economic expansion.
>
>
>"A fundamental reform of the international monetary system has long
>been overdue. Its necessity and urgency are further highlighted
>today by the imminent threat to the once mighty U.S. dollar."
>
>Robert Triffin
>November 1960
And this was after a decade, the 1950e, in which the U.S. ran trade surpluses in eight out of ten years - and would match that record in the coming decade, the 1960s. Since the U.S. was a substantial net creditor in those days, the current account was deeply in the black. But the financial account was in the red - mainly because of investment abroad by U.S. - and "unilateral transfers" (e.g., military spending) were also large, resulting in the dollar glut abroad. Now the financial account is in the black - because of foreign capital inflows - but most of the rest have shifted sharply to the negative. I don't have pre-1960 numbers at hand, but let's compare some of the balances from the 1960s with 2002's:
U.S. INTERNATIONAL BALANCES, % OF GDP
1960s 2002
goods and services +0.6% -4.2% investment income +0.7% -0.1% unilateral transfers -0.7% -0.5% current account +0.5% -4.8% financial account -0.4% +1.5%
So the magnitude of the dollar buildup abroad is much much greater. And Triffin was addressing what people saw as a growing monetary crisis - which looks like pretty small change compared to now.
"Forever" can last only as long as foreign creditors happily suck up U.S. dollars, an asset that has lost a third of its value over the last year or so.
Doug