The US dollar is the grease that lubricates the wheels of globalisation. In this much, at least, close observers of the world economy agree. Importers and exporters need a universally-accepted means of payment in which to conduct their transactions. Investors need a vehicle with which to pay for their acquisition of foreign factories and financial assets. Central banks need a form in which to hold their reserves. Official and private users need to be sure that their counterparties, wherever they are located, will accept payment in the proffered form.

And in 2017, the dominant such form is the US dollar.

Indeed, despite the fact that the global financial crisis of 2007-8 originated in the United States, the share of dollars in the foreign exchange reserves of central banks and governments hardly budged, as my coauthors and I show in a new book. The greenback remains the main currency traded in foreign exchange markets. It is still the unit in which petroleum is priced, notwithstanding the complaints of Venezuelan leaders.

But this observation points to a contradiction at the heart of the 21st century globalisation. Back in 1960, a decade and a half after the conclusion of World War II, the US accounted for 40 per cent of the global economy, creating a logic for widespread international use of the dollar. But with the recovery of Europe and the growth of emerging markets, the US share of global GDP has declined. Today, following two decades of Chinese super-growth, the US share of global GDP is barely half that of 50 years ago.

The idea that emerging markets, currently experiencing a juvenile growth spurt, will grow faster than the mature economies implies that the US share of global economic activity will continue to fall. By implication, America won’t be able to provide the safe, liquid and universally-accepted means of payment needed to support global transactions indefinitely, and all on its own.

“Alarmists argue that there is no way out: currently, the dollar is no longer capable, while the Chinese renminbi is not yet ready”

Moreover, as foreign holdings of US treasury bonds and bank accounts come to exceed the capacity of Washington, DC to raise tax revenues and service its debts, confidence in claims on the US government will diminish. There will then be flight from the dollar, a dearth of international liquidity,…

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