Concern about global imbalances has been building since the 1990s and analysts from a variety of disciplines have called attention to aspects of the problem, ranging from the unsustainability of the U.S. current account position to the role of ‘under’ and ‘over’ saving rates in deficit and surplus countries. Many analysts assume that imbalances arise as a result of developments and policies within national economies. This paper argues that imbalances also result from interactions at the global level and are at least partially shaped by pressures generated by the current international monetary and payments systems on the direction and volume of international capital flows.

This paper discusses the ways in which a fiat currency and privatized international payments system under the guardianship of a few wealthy developed countries and their private multinational financial institutions have contributed to the problem.  It examines the U.S. international investment position, noting the links between changes in net capital flows and credit expansion and between foreign exchange reserves held in the U.S. and liquidity creation. It discusses the risks in failing to address the U.S. foreign debt problem and offers proposals needed to address the monetary aspects of global imbalances.