Massive increases in deficit spending causes inflation

The international monetary system remains dollar-based despite decades of warnings that the central role of the dollar was coming to an end. Some critics pointed to fundamental flaws in what economist José Antonio Ocampo has called a (non) system. It provides no automatic adjustment for persistent current account imbalances. It allows for significant, often damaging, policy spillovers from large countries (especially the United States) to smaller ones. There is no nominal anchor for global inflation, and, finally, there is no assured lender of last resort. Implicitly, these critics assumed that a system with such flaws could not long endure. Until now, they have been proven dead wrong.

Other critics pointed to developments that might have been expected, gradually but continuously, to lower confidence in the U.S. dollar as a store of value and as a medium of exchange. As the U.S. share of global GDP has continued to shrink, its capacity to service an ever-growing stock of international debt (the Triffin dilemma) has become increasingly questionable; surely “vendor financing” cannot continue forever? Moreover, concerns have been raised at various times about relatively high inflation in the United States as well as the relative commitment of the U.S. Federal Reserve to resist inflation. Massive increases in the U.S. government deficit and debt have recently raised fears that an excessively bipartisan Congress would lose control. This has led in turn to growing worries about “fiscal dominance” and eventually much higher inflation. Finally, resentment over the repeated use of the U.S. dollar as a geopolitical “weapon” was rising well before the imposition of sanctions on Russia.