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The Dollar As an International Currency

I predict that the U.S. will have high and variable inflation in a few years. That makes standard U.S. government a risky investment. We are worried that the Chinese and others will bail out of it. Yet I think we can retain the benefits of being able to sell our debt to foreigners and Americans. We just need to delink the function of store of value from the function of medium of exchange. Here are three ways:

1. Issue more inflation-indexed bonds. We already have some. Foreigners, especially, should want them.

2. Issue bonds denominated in dollars but whose interest payments are in dollars equal to a fixed number of Swiss francs.

3. Issue bonds indexed not to inflation generally, but to a small basket of goods with stable relative prices. I am thinking of Hall’s “plywood standard”. This avoids the risk of the U.S. government changing the CPI or other ordinary price index.

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