Kenneth R. Szulczyk
Over time, the hegemony begins declining, and harmonious relationships break down. Then a
war follows, and, in the aftermath, a new hegemony rises.
Some people argue the United States grew into a selfish hegemony. The U.S. dollar became
the international currency that the U.S. government abuses. The U.S. government accumulated a
large public debt, and the U.S. economy suffers from sizeable trade deficits, causing an outflow
of U.S. dollars into the international markets. Some foreigners and central banks hold onto to
these dollars. For example, the U.S. buys petroleum from Russia. As Russia sends oil to the
U.S., the Russians retain the U.S. dollars, which are pieces of paper. Furthermore, many
foreigners save their earnings in U.S. dollars while others invest in the U.S. government’s debt.
Again, they are buying U.S. Treasury Securities, which are pieces of paper. For now, these
pieces of paper have value, but some question whether the U.S. government can finance the dual
deficits over a long time period. If the U.S. dollar collapses in value, then foreigners will possess
worthless pieces of paper. Consequently, countries that are not hegemonies cannot accumulate a
large government debt by getting foreigners to invest in it.
As the United States grew into a hegemony, it cannot have a current account surplus
because the surplus could devastate the world’s economy. International businesses, banks, and
governments use U.S. dollars to settle international payments. If the U.S. current account
approached zero, then a liquidity crisis would strike the world because people, businesses, and
the government have no means to settle international payments. A hegemony’s trade deficits
become a money source for the world’s economy.
Key Terms
current account
financial account
balance-of-payments equation
U.S. Official Reserve Assets
statistical discrepancy
exchange rate regime
gold standard
fixed exchange rate system
deflation
Bretton Woods System
International Monetary Fund (IMF)
World Bank
Special Drawing Rights (SDRs)
free float
clean float
managed float
dirty float
pegged exchange rate
dollarization
seigniorage
J-curve Effect
capital flight
relational power
structural power
hegemonyChapter Questions
- Explain the purpose of the balance-of-payments accounts.