On the books of a corporation, there are assets and liabilities. The difference between the two is its net worth, i.e. its value from an accounting point of view. If the figure is negative, the corporation is said to be bankrupt. Nations also have assets and liabilities. The balance between the two is called the "net international investment position". The figure for the United States is negative. Worse, it has been growing from minus $34 billion in 1979 to minus 7,725 billion (40% of GDP) in 2017. The United States is not only bankrupt, it is sinking in unchartered territory. Does it matter? Does it threaten the dollar supremacy?
World trade and financial relations are a zero-sum game. The net liability of a country is the net asset of another. The United States' foreign debt is matched by other countries' loans. As long as they are willing to lend, the United States should not concern itself with its growing dependence on external borrowing. But, shouldn't these countries be worried over the United States' increasingly weak financial structure? Of course, they should. But, they really don't. Why? Because this structure arises from an American over-consumption which translates into U.S. imports which feed into the lending countries' exports, economic growth and employment. Then, the dollars they raked in are invested in U.S. Treasury' bonds. The circle is complete. Couldn't they invest in other financial assets? Nope. The U.S. treasury bond market is the largest and most liquid financial market. This is why two of the world's largest exporters, Japan and China, are also the largest holders of U.S. Treasury bonds.
But, wouldn't these countries prefer to hold their financial assets in currencies other than the dollar? Of course, they would. But the dollar is not only the international reserve currency the currency in which nations invest their savings it is also the currency of choice for international trade and financial transactions: 87% of them are denominated in dollar. The world can't escape the dollar. Why? Because no currency can compete with it. The euro is a distant second, and in spite of all the talk about the internationalization of the yuan, the Chinese currency is a long way from ever becoming an international reserve currency. The dollar has no competitor.
What about a non-national currency? In 1944, at a conference convened by the United States in Bretton Woods (New Hampshire) to institute a new international monetary system, British economist, John Maynard Keynes, proposed to create a new currency which he called the "bancor" to replace the pound sterling which had been the international reserve currency since the early 19 th century. The United States turned down his proposal and imposed the dollar instead. Its value was set in terms of gold, an ounce of gold being worth $35 dollars. But the dollar cannot be both a national and an international currency. The two roles are incompatible, as history will demonstrate. In 1962, Belgian economist Robert Triffin stated the dilemma as follows: --if the United States corrected its persistent balance-of-payments deficits, the growth of world reserves could not be fed adequately by gold production at $35 an ounce, but if the United States continued to run deficits, its foreign liabilities would inevitably come to exceed by far its ability to convert dollars into gold upon demand and would bring about a 'gold and dollar crisis'". In layman's terms, the quantity of dollars the world requires to meet the need of an ever-expanding trade exceeds the United States' ability to satisfy the demand for gold while preserving the value of the dollar in terms of gold. The crisis came as predicted by the economist.
In 1969, the Special Drawing Rights (SDR) were created a sort of a phony money that nations were asked to use as a dollar replacement. They had zero appeal, and to this day are nothing more than an ersatz. So, the dollar whose value is no longer set in terms of gold but float freely in foreign exchange markets, continues to be used in international transactions. Its role was reinforced in 1973 with SWIFT (Society for Worldwide Interbank Financial Telecommunication) which speeds up and secures dollar transactions around the world. It is used by over 11,000 banks in 200 countries. The dollar reigns supreme.
In due course, the SDRs will have to become a real currency to replace the dollar. But its transformation raises tough questions. Among them are the following two: how will the SDRs value be defined and who will control the quantity in circulation? Will it be allowed to float freely, as the main currencies do today? Or, will its value be set in terms of a basket of currencies? In a rational world, individuals would seat at a table and resolve these issues in a rational manner to the satisfaction of the greater number. But we don't live in a rational world. Only a major crisis, it seems, we force us to come to grips with this problem. In the meantime, we stick to the devil we know"
The greatest threat to the dollar supremacy is its weaponization. The American government uses it to enforce its decisions with countries it regards as "unfriendly" in an extraterritorial, therefore illegal, manner, forcing them to resort to alternative methods of trading with other nations. This policy is potentially very damaging to the United States and the dollar.
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