In the first article of this series, we explored the foundations of the international monetary system: its pillars, the Mundell triangle, and the impossible choices faced by states. But understanding the architecture of the IMS is not enough. We must now descend into its concrete dysfunctions: the dilemmas that have blocked reform for decades and trapped us in a cycle of financial crises, currency wars and ecological destruction.
The present international monetary system rests on several mutually reinforcing contradictions: the Triffin paradox, which undermines the legitimacy of the dollar as the world’s reserve currency; the Kareken and Wallace paradox, which reveals the theoretical instability of an international system based on multiple inconvertible fiat currencies; the globalized extractivist paradigm, which pushes nations to exploit natural resources in order to balance their external accounts; competitive devaluation; and finally the geopolitical hegemony of the United States.
These dilemmas are not minor technical malfunctions. They are structural dead ends. Together, they reveal the obsolescence of the system as a whole. Worse still, they lock us into a destructive myth of Sisyphus: an endless compulsion to exploit the living world in the name of an accounting balance that is never truly reached.
The Triffin paradox: the curse of the reserve currency
The asymmetry of the dollar
Since the collapse of Bretton Woods in 1971, the US dollar has occupied a unique position in the international monetary system. It is both the national currency of the United States and the main reserve currency of the world. This double function generates what is known as the Triffin paradox, named after the Belgian economist Robert Triffin, who formulated it in 1960.
The paradox is simple: for the rest of the world to have enough dollars to trade and accumulate reserves, the United States must run balance-of-payments deficits. It must supply the world with dollars by importing more than it exports, investing abroad or allowing dollar-denominated liabilities to accumulate.
But this situation creates a fatal contradiction. The more the United States floods the world with dollars, the more confidence in those dollars is eroded. If Washington reduces its deficits to preserve the credibility of the dollar, the world lacks international liquidity and trade contracts. If it lets deficits expand to irrigate the world economy, the abundance of dollars eventually triggers crises of confidence and flights into other assets.
The exorbitant privilege
This asymmetry gives the United States what Valéry Giscard d’Estaing famously called an “exorbitant privilege”: the ability to borrow in its own currency, finance deficits through monetary creation and export part of the costs of its policy choices to the rest of the world.
The consequences are geopolitical as much as economic. Deficit countries outside the United States must adjust through recession, austerity or expensive foreign borrowing. The United States, by contrast, can maintain external deficits without immediate pressure. Because the dollar is the invoicing currency of much of world trade, Washington can also use the banking system as a geopolitical weapon through extraterritorial sanctions.
No solution within the current framework
The Triffin paradox is a structural impasse. As long as the dollar remains the dominant reserve currency, the system is trapped: either the United States maintains its deficits and erodes trust, or it restores balance and suffocates global liquidity.
Attempts to create alternatives — IMF Special Drawing Rights, the euro, the Chinese yuan — have so far only marginally redistributed the cards. They have not ended the dollar’s centrality. And as long as the creation of international liquidity depends on the deficit of a single country, the system will remain fundamentally unstable.
The Kareken and Wallace paradox: the intrinsic instability of fiat currencies
Beyond the Triffin paradox, another theoretical dilemma undermines the foundations of the IMS: the Kareken and Wallace paradox. It shows that an international monetary system based on several inconvertible fiat currencies is intrinsically unstable.
Exchange-rate indeterminacy
Kareken and Wallace argued that when several fiat currencies coexist without any material anchor such as gold, there is no natural mechanism capable of determining their relative exchange rates in a stable way. Without an external common anchor, exchange rates between currencies are fundamentally arbitrary and volatile.
Why? Because the value of fiat money rests entirely on collective confidence in its future purchasing power. But this confidence itself depends on the expectations of economic agents — expectations that are speculative, fragile and self-fulfilling.
Multiple equilibria, therefore no real equilibrium
The paradox reveals that in a floating-exchange-rate regime between fiat currencies, there are theoretically infinite possible equilibria. That is another way of saying that there is no stable equilibrium at all. The system can switch from one state to another without any fundamental economic reason, merely under the effect of expectations and speculation.
This indeterminacy creates structural volatility. It weighs on international trade, amplifies financial crises and opens the door to massive speculative gains at the expense of the real economy.
The globalized extractivist paradigm: an ecological myth of Sisyphus
But the most devastating dilemma of the current IMS — and the least discussed — is the one that links international monetary logic directly to the destruction of ecosystems.
The trade-balance constraint
Under the current system, every nation must watch its trade balance: the difference between the value of exports and the value of imports. A chronic trade deficit means that the country imports more than it exports, accumulates external debt and sees its foreign-exchange reserves drain away.
To rebalance, a country has three main levers. It can export more goods and services, which means producing more and therefore using more natural resources. It can devalue its currency, making exports cheaper and imports more expensive, but this triggers currency wars and reduces purchasing power. Or it can borrow abroad, which creates a debt that will eventually have to be repaid — usually by exporting even more.
Whichever path is chosen, the result is the same: a structural pressure toward extraction.
The trap of extractive specialization
Developing countries, often rich in natural resources but poor in capital and technology, are caught in a deadly trap. To obtain the foreign currency needed to import manufactured goods, technologies and services, they must export raw materials.
Oil, minerals, timber and agricultural products flow toward industrialized countries. The foreign exchange received is then used to import higher-value goods. This reproduces the colonial logic in monetary form: the South exports its natural heritage to balance its accounts, while the North transforms these resources and resells them with added value.
But the logic is not limited to developing countries. Advanced economies are also caught in the extractivist spiral. Australia exports coal and iron ore. Canada exports oil from tar sands. Norway exports gas and oil. Everywhere, states try to defend external balances by exploiting soils, forests, oceans and subsoils.
A destructive myth of Sisyphus
Here lies the heart of the problem. The IMS condemns nations to an ecological myth of Sisyphus. To maintain an accounting balance, they must extract, produce and export. But extraction generates ecological imbalances — resource depletion, CO₂ emissions, pollution, biodiversity loss — which ultimately destroy the foundations of the economy itself.
We dig ever deeper holes in nature in order to fill ever larger holes in our accounting sheets.
Like Sisyphus condemned to push his rock forever up the mountain, nations are condemned to exploit their resources forever in order to balance their accounts — an equilibrium that remains out of reach because every cycle of extraction deepens the ecological deficit.
The impossibility of decoupling
The dominant discourse claims that technological progress will allow a “decoupling” between economic growth and resource consumption. But facts keep contradicting this promise. Despite decades of improved energy efficiency, global CO₂ emissions have continued to rise. Despite rhetoric about the circular economy, extraction of raw materials keeps reaching historic highs.
Why? Because the IMS imposes a logic of export growth to maintain trade balances. And that growth, whatever the technology used, ultimately depends on the extraction of natural resources.
As long as the international monetary system operates according to this accounting logic — where external balance takes precedence over the preservation of the living world — no genuine ecological transition will be possible.
Currency wars: the race to the bottom
Another major dilemma of the current IMS is the so-called currency war: a competition between nations to devalue their currencies in order to gain export market share.
The mechanism of competitive devaluation
When a country devalues its currency relative to its trading partners, its exports become cheaper for foreign buyers. But the strategy has a reverse side: imports become more expensive, citizens lose purchasing power, and other countries retaliate by devaluing in turn.
The result is a race to the bottom. Each country tries to devalue faster than its neighbours, in a spiral that benefits no one and impoverishes everyone. Citizens see purchasing power eroded, savers see assets weakened, and monetary instability discourages long-term investment.
This dynamic became especially visible after the 2008 crisis, when major central banks — the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England — all pursued ultra-accommodative monetary policies whose effect, intended or not, was to depreciate their currencies.
The absence of binding rules
The fundamental problem is the absence of enforceable rules against competitive devaluation. The IMF is supposed to monitor exchange-rate policies, but it has no real sanctioning power. The United States accuses China of manipulating the yuan; China accuses the United States of weakening the dollar through quantitative easing; Europe complains about both — and nothing changes.
As long as the IMS rests on competing national currencies, currency war will remain a permanent temptation and a chronic source of instability.
American hegemony and the exorbitant privilege
The geopolitical dimension of the IMS must be faced directly. Since the end of Bretton Woods, the US dollar has remained the dominant reserve currency, the main invoicing currency for international trade and the reference currency for many commodities.
This position grants the United States extraordinary advantages: unconstrained borrowing in its own currency, the ability to export part of its inflation, and a geopolitical weapon through the dollar-based financial infrastructure.
It also generates a fundamental asymmetry. When the United States runs a trade deficit, it can simply issue more dollars to finance imports. Other countries must adjust through recession, austerity or costly external borrowing.
For decades, the end of dollar hegemony has been announced. The euro was supposed to challenge it. It did not. The yuan was supposed to dethrone it. It remains marginal in global reserves. Cryptocurrencies were supposed to replace it. They remain volatile and weakly used in real trade.
The dollar remains king not because of collective wisdom, but by default. And this default perpetuates the imbalances of the IMS.
Conclusion: a system at an impasse
The current international monetary system is trapped in structural dilemmas that reinforce one another. The Triffin paradox undermines the dollar’s stability as a reserve currency. The Kareken and Wallace paradox reveals the instability of a system based on inconvertible fiat currencies. The extractivist paradigm forces nations to exploit natural resources endlessly in order to balance their trade accounts. Currency wars encourage competitive devaluation. Dollar hegemony concentrates monetary power in the hands of a single state.
These dilemmas are not bugs. They are features of the system’s architecture. No partial reform will be enough to solve them. As long as we keep the same monetary software, we will remain trapped in an extractivist and predatory logic.
That is why a radical redesign is necessary — not a reform of the IMS, but its replacement by a fundamentally different system capable of aligning monetary incentives with the preservation of the living world.
In the next articles, we will explore the turbulent history of international monetary crises, then the proposal I develop through NEMO IMS: a monetary architecture anchored in the regeneration of living systems rather than in debt and extraction.
← Article 1: What Is an International Monetary System? · Article 3: A History of International Monetary Crises →