The U.S. Dollar Hegemony And The Sustainability Of The U.S. Current Account Deficit

The United States current account deficit has been growing since 1990s. It has received a lot of attention from international society and scholars and researchers from both home and abroad because of the United States'status in and contribution to the global economy. So far, most of researches have been done from three perspectives: 1. the United States'saving, investment and consumption; 2. the economic development strategy of Eastern Asian countries; 3. financial globalization. Among all the factors having effects on the United States current account deficit, the U.S. dollar hegemony is very important but easy to be forgotten. Since the end of World War II, the U.S. dollar, as the United States'domestic currency, has been the dominant world currency. The hegemony of dollar is an important feature of current international monetary system. The growing U.S. current account deficit and world economic imbalance have something to do with the U.S. dollar hegemony to some extent. But the relations between the hegemony of dollar and U.S. current account deficit are less mentioned and researched. Based on analysis of the U.S. dollar hegemony'origin and influence, this paper tries to explore the cause and sustainability of the large U.S. current account deficit from the unique perspective of U.S. dollar hegemony.This paper includes four chapters. In chapter 1 (Introduction), the theoretical and practical significance of this subject is introduced, the relevant research of scholars from both home and abroad is outlined, the structure of this paper is introduced, the main viewpoints and the author's creativity is also given. In chapter 2, the evolution of U.S. dollar hegemony is reviewed. Firstly, the U.S. dollar'rise is described briefly. It is during the period from 1900 to 1945 that the U.S. dollar started to rise on the international monetary stage. The United States became the strongest power of global economy and the dollar's status and influence were rising consequently. Secondly, it is reviewed how the Bretton Woods System and the U.S. dollar hegemony were built. The new international monetary order-- Bretton Woods System was established at the Bretton Woods international financial conference in July, 1944. This official monetary order based on"White Plan"proposed by the United States made the U.S. dollar the dominant world currency. Under the Bretton Woods monetary order, other nations declared official exchange rate parities against the dollar. The establishment of U.S. dollar hegemony, to a certain extent, overcame the situation of international monetary disorder before World War II, provided a stable international economic environment and promoted the development of world economy and trade. The United States gained enormous economic benefits through the establishment of dollar's status as world currency. Finally, the hegemony of dollar after the Bretton Woods System is analyzed. The Bretton Woods System broke down because of"Triffin Dilemma". But that didn't shake dollar's hegemonic position in the international monetary system. To the present day, the dollar is still the main currency serving as unit of account, medium of exchange and store of value in the world economy.In chapter 3, relations between the U.S. dollar hegemony and the U.S. current account deficit are researched. Firstly, I try to put the recent U.S. experience in historical perspective, looking at the evolution of the U.S. current account deficit since 1980s. The U.S. current account balance became deficit since the middle of 1980s and the deficit has been growing. The huge deficit of the U.S. current account has become the focus of international attention. Secondly, relations between the U.S. dollar hegemony and the U.S. current account deficit are analyzed by combining dollar's status as world currency and the economic benefits the United States gets from hegemony of dollar. 1. The U.S. dollar hegemony is the essential cause of U.S. current account deficit. The United States must maintain its current account deficit through importing material resource and exporting international liquidities—dollar to meet the needs of development of the world economy. In addition, the United States has developed the world's largest, deepest financial market by its economic strength and dollar's hegemonic status. The uniqueness of the dollar and bonds, the depth and breadth and liquidity of the United States'financial market and the relatively strong economic growth in the United States attract a lot of international capital to flow into the U.S. financial market to finance its huge current account deficit. 2. The U.S. dollar hegemony forces other countries to accumulate dollar assets continuously to finance the U.S. current account deficit. The U.S. dollar is world currency and the American price level becomes the (informal) nominal anchor for the international monetary system. Other countries have to build huge official exchange reserves—which are mainly dollar denominated and often consist of U.S. Treasury securities-- to intervene in the foreign exchange market in order to avoid the impact on the domestic economy caused by the fluctuations of exchange rates of their currencies against the dollar. The U.S. dollar hegemony also results in"currency mismatch"in developing countries which tends to cause financial crisis. After Eastern Asian financial crisis in 1997, Eastern Asian countries and districts increase their dollar reserves quickly to deal with the currency attack from external speculators. 3. Through collecting and computing relative data, we can reach following conclusion: The huge international seigniorage resulting from the U.S. dollar hegemony is one of the most important sources financing the U.S. current account deficit.In chapter 4, the sustainability of the U.S. current account deficit is researched by analyzing those relative factors. In the short term, the United States can still stably get huge return on its net foreign assets which makes the U.S. current account deficit sustainable because the demand and supply of international currency will not change a lot. However, the U.S. current account deficit is unsustainable in a long term. With the continuous accumulation of the U.S. current account deficit, investors must doubt the value of dollar and that will cause the dollar to depreciate. The fall of dollar's hegemonic status will lead to the difficulty of foreign capital's inflow which will make the U.S. current account deficit more unsustainable. Moreover, faced with the exchange rate risk when the depreciation of the dollar and the increase of domestic money supply, Eastern Asian economies can't continue to increase their dollar reserves indefinitely.