The Transition Problem

Abstract

This chapter identifies some points to be considered when the problem of transition from the existing situation to one in which the threat of instability no longer looms over the international financial system. Ideally, transition must be confronted collectively by a group of nations to fashion a medium-run set of policies (and “rules”) that will defuse the dangers of instability that derive from having a nearly exhausted dollar-reliant system. The transition must, then, be provided with a set of policies, principles and constraints (a system), which will facilitate those policies that the situation requires.’ The crucial aspect is that the vulnerability of the US dollar to financial crisis must be eliminated. To accomplish this, the United States must recognize the need for and be allowed to run current surpluses without reducing the value of the dollar to the point that it would activate the international trigger.²