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They would have to buy most aggressively when prices are high and their surpluses are large, and they would most likely have to monetize their reserves when prices are low and their economies are struggling. But because these countries account for 70-75 percent of the world’s current account deficits (with the developing world accounting for most of the rest), this would also mean that, unless some other large economy proves willing to convert its surpluses into massive deficits, the world would have to reduce its collective trade surpluses by 70-75 percent. The issue of the dollar is part of the debate over global capital flows, but capital flows are just the obverse of trade and current account flows. 1 Some analysts have suggested that the issuer of a major reserve currency does not need to run persistent deficits, and in support they point to the current account surpluses that Great Britain ran for much of the period when sterling was the world’s leading currency. But if the United States at some point refuses to run the permanently rising deficits that are needed to accommodate weak demand and excess savings in the rest of the world, deficits which underpin the global dominance of the dollar, how does this process ultimately resolve itself?

This is probably a good thing for the global economy overall, but with so many major economies locked into structural domestic demand deficiencies, any policy that forces an elimination or sharp reduction of global trade imbalances also would force deep institutional changes in the global economy-changes which also would likely be politically disruptive for many countries. The global trading system is terribly unbalanced, with several large economies-including China, Germany, Japan, and Russia-locked into unbalanced income distributions that reduce domestic consumption and force up their savings rates. When the Chinese economy is growing rapidly, its commodity consumption is likely to rise sharply, and given its disproportionate role in commodity markets, rising Chinese consumption will drive up the prices of commodities. Countries like Russia, Iran, and Venezuela are all primarily commodity exporters, which makes the arithmetic of reserve accumulation very tricky. But while there has been much debate over whether or not the world-or at least part of the world, including countries like China, Iran, Russia, and Venezuela-can live without the dollar, there has been much less attention on an equally important issue: what the trade impact would be of a world less tied to the U.S.

American constituencies, this status creates an exorbitant burden for the U.S. For all the tremendous geopolitical power that control of the global currency system confers on Washington and Wall Street, it comes at a substantial economic cost to American producers, farmers, and businesses, and as the rest of the world grows relative to the United States, this cost can only increase. U.S. economy over which Washington will fight, but because it allows many of the world’s largest economies to use a portion of American demand to fuel domestic growth. Washington and its allies could do so by negotiating a new set of trade agreements that would force members to resolve their domestic demand imbalances at home, rather than force their trade partners to absorb them. Wall Street, and it would extremely painful and in some cases even destabilizing for countries-like China, Germany, Japan, Russia, and Saudi Arabia-that would likely prove unable to quickly resolve domestic demand and savings imbalances. What is more, by transferring part of its domestic demand abroad, the U.S.

U.S. economy. Although any move to limit the international use of the dollar would be opposed by parts of Wall Street and the foreign affairs and military establishments, as the costs rise, this outcome will become increasingly likely. When the Chinese economy is growing slowly, on the other hand, commodity prices are likely to drop. Will Acquiring Commodity Reserves Provide an Alternative? These same sanctions also make clear, however, why the governments of other countries that might one day be subject to such penalties are doing all they can to opt out and establish an alternative global currency system-either one they control or one that is unlikely to be controlled by potential adversaries. The dollar is the most widely used currency in international trade not just because of network effects, but also for other reasons that are hard for other countries, especially countries like China, to replicate. To understand the implications, let’s assume a country that runs persistent trade surpluses is forced to adapt to a world of much lower trade deficits, and hence of much lower trade surpluses.

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