The Post-Bretton Woods System and US External Unsustainability

Abstract

The persistent US current account deficit, supported by the post-Bretton Woods system, will continue to worsen the country's net foreign debt position. The net foreign debt-to-GDP ratio, shaped by factors such as the US budget deficit, the gap between private investment and savings, investment income, and GDP growth, will steadily increase as it approaches a critical threshold. Shifts in these factors will push the trajectory of the ratio upward, and foreign investors' willingness to hold US assets will play a pivotal role as the ratio nears its limit. Exceeding this threshold could trigger a balance of payments crisis. Furthermore, the weaponization of the US dollar has significantly eroded its credibility as the cornerstone of the post-Bretton Woods system, raising concerns about the US's ability to sustain its external debt and finance its deficits without precipitating a financial crisis.