The Fraying of the US Global Currency Reserve System
Lyn Alden · 2020
"Structural imbalances in the dollar reserve system are straining and will drive a long-term monetary shift."
In December 2020, Lyn Alden argued that the dollar reserve system is not about to collapse — it is slowly re-aligning. Taking a quantitative look at the near-50-year-old petrodollar arrangement, she traced how the mechanics that once locked the world into holding dollars are fraying, for the United States and its trading partners alike.
The petrodollar system, built after Bretton Woods collapsed in 1971, worked because the world needed dollars to buy energy, and the dollars earned were recycled into US Treasuries. That structure carries the Triffin dilemma: a reserve-currency issuer has to run persistent current account deficits to supply the world with its currency, which gradually undermines the issuer's own balance sheet. Alden's point is that the incentives on both sides are weakening. China, which earns large dollar trade surpluses, increasingly uses them to finance hard-asset projects abroad rather than recycling them into US government debt. As the United States' means and motives to maintain the system weaken, foreign holders have less reason to keep funding it — and settlement in other currencies, gold, or central bank digital currencies becomes more attractive.
According to Alden, what structural feature of the reserve-currency system guarantees it will erode over time?
Read more about the topic
The explanation above is written with AI assistance. These are the originals — go to them to check it.
- The Fraying of the US Global Currency Reserve System — the original essayLyn Alden
- The Changing World Order — dollar hegemony and reserve-currency cycles (Dalio)House overview / Bridgewater
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