In this paper, I have presented three mechanisms that have historically created an exogenous demand for dollars. These mechanisms can be modeled as global asset preference shifts which increase both the debt of the US and appreciate the exchange rate of the dollar in the short run. I suggest reasons for why these mechanisms may reverse and asset preferences will shift back toward foreign assets. I conclude with a discussion of how these mechanisms might be reversed and what their implications would be for the U.S. and the rest of the world.
Neither of these options is attractive, but as a nation and world, we need to be honest about the position in which we find ourselves. Either the dollar will experience a slow but complete devaluation accompanied by eventual bankruptcy of the U.S., or the dollar will experience a quick devaluation (but not to worthlessness), followed by a return to equilibrium. Both options will have an associated level of chaos as the world grapples with a need to find a new way to settle accounts. Both options will lead to some level of default by the U.S., which will increase hostile feelings toward the U.S. However, point “6b” represents the potential for redemption, while point “6a” represents total and complete bankruptcy.
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