Since 1971, the floating, world dollar standard has been even more perverse and crisis-prone than the reserve currency systems of Bretton Woods and of the interwar era. Indeed, the privilege and the burden of the dollar’s role as the world’s official reserve currency has been a cause not only of extreme inflation and the threat of deflation, but also of industrial and manufacturing displacement in the United States. The world dollar standard is a primary cause of declining U.S. competitiveness, a witness of which is the collapse of the international net investment position of the United States. In 1980, the U.S. net international investment position was 10% of GDP. In 2010 it was negative 20% of GDP. The difference was equal to the increase of foreign-held official dollar reserves, arising from continuous U.S. balance-of-payments deficits.
Under the official reserve currency system based on the dollar, the perennial U.S. balance-of-payments deficit will, more often than not, continue to flood foreign financial systems and central banks with undesired dollars—followed by brief periods of dollar scarcity, the threat of deflation, and a cyclical rise of the dollar on foreign exchanges. Foreign monetary authorities will continue to purchase excess dollars against the issue of new domestic money, thus duplicating potential purchasing power unassociated with the production of new goods—tending to sustain worldwide inflation, followed by recession and the threat of deflation. So-called sterilization techniques designed to neutralize foreign exchange inflows are not fully effective. Without monetary reform, the excess dollars purchased by foreign central banks—reinvested in U.S. government securities and other dollar claims—will continue to finance excess consumption and rising government spending in the United States.