3. U.S. Current Account Deficits and the Dollar Standard’s Sustainability: A Monetary Approach

Economists have failed rather dismally to construct convincing theoretical models of why the seemingly endless US current account deficits are sustained by a seemingly endless willingness of the rest of the world to acquire dollar assets. Reflecting this conceptual inadequacy, many see the continuation of such global “imbalances” to be unsustainable because foreigners – both governments and their private sectors – will eventually cease buying dollar assets, which will trigger a collapse in the dollar’s value in the foreign exchanges. Beginning with the infamous twin deficits of the Reagan presidency in the 1980s, such failed predictions have been commonplace for more than 20 years.