The double demise of Bretton Woods 2

The arrangement in place between the United States and China from the late 1990s to 2013 has been known as the Bretton Woods 2 international monetary system. The United States bought cheap Chinese products, leading it to have an external deficit with China; This external deficit was financed by purchases of assets in dollars (Treasuries, bank deposits) by the People’s Bank of China, which accumulated foreign exchange reserves thanks to China’s external surplus. The Bretton Woods 2 system was good for both the United States and China: the United States ran up debt with China at low interest rates in order to finance its consumption of cheap Chinese products; China produced more to sell to the United States, which it did by lending the United States the money to buy its products. The Bretton Woods 2 system has now collapsed for two reasons: The United States wants to stop importing Chinese products, probably due to concern at the rise of Chinese technology; China has stopped lending to the United States, because it is no longer accumulating foreign exchange reserves under the effect of population ageing, fiscal deficits - reducing the external surplus - and capital outflows .