The Global Imbalances and the Instability of US Monetary Hegemony

Abstract

In this chapter I re-examine the instability of US monetary hegemony from a comparative capitalism perspective. As noted in the previous chapter, a prevailing interpretation in the international monetary power literature is that the main source of global instability arising from the monetary hegemony of the United States is the excessive growth of foreign liabilities associated with its structural power to delay adjustment, which tend to undermine foreign confidence in the stability of the dollar as the world’s key currency (KC). There appears to be a strong correspondence between this international monetary power interpretation of the instability of US monetary hegemony and the “Triffin dilemma” interpretation, which argues that growing foreign demand for dollar liquidity can only be met by growing US external deficits that risk eroding foreign confidence in the dollar. An important yet neglected question is whether the increase in foreign demand for dollar-denominated liquid assets — particularly in EMEs — has been exogenous or endogenous to the capacity of the United States to avoid the burden of adjustment: has the increase of dollar accumulation in EMEs since the second half of the 1990s been the cause or the effect of the macroeconomic expansion and the rise in the US current account deficit? By neglecting this question scholars of US monetary power have not only been able to account for the instability of US monetary hegemony but also failed to challenge the global savings glut (GSG) theory, which claims that the rise in the US current account deficit was caused by excess savings in EMEs and an associated exogenous rise in dollar accumulation (e.g. Bernanke 2005; Dumas 2008: Ferguson and Schlumarick 2007: Wolf 2008).