Good links, thank you. Triffin, who introduced the idea of the "supranational currency", and formulated Triffin's Dilemma - that the reserve currency status implies trade deficits for the issuer - arrived at his conclusions in specific circumstances (the "free market" assumptions in place) and in a specific country (the US). He
observed (at the bottom of the page):
"A fundamental reform of the international monetary system has long been overdue. Its necessity and urgency are further highlighted today by the imminent threat to the once mighty U.S. dollar."
Robert Triffin
November 1960
But the US ran trade surpluses for quite a few years after 1960.
1. It would be nice to define what the concept of "a world reserve currency" means. I formal accounting terms, if the US lends dollars to a country, than this country should not post these dollars as "reserves" to its balance sheet, it should rather post them as a liability.
So to finance continuously that other country's dollar "reserves" qualifying as such on the balance sheet basis, the US is left with few viable options other than generate a trade deficit with this country (other options being: capital investment - limited in scope/protectionist issues; "dropping dollars from helicopter" - ...).
However, one other option is to disburse the dollars in exchange for that other country's currency. The US would then avoid the trade deficit expansion, but would have to hold a basket of other countries' currencies with all the risks associated with this holding. I do not know the mechanics of SDRs , but probably they are not very dissimilar from this currency basket mechanism. To assume all these risks would be too audacious a proposal for the US (or any other country), and this is why the reserve currency management is preferred to be delegated to a "supranational" body, which would assume appropriate monitoring, regulation and risk-hedging.
But this thread seems to be more concerned with the role of a world reserve currency as medium for settlement of cross-border transactions, rather than with the formal accounting treatment of FX flows. To provide a such a "medium" currency, the issuer country could act as the world's central bank and could therefore lend its currency (USD in the case of the US) to other countries. Unlike a central bank, the issuer country could however charge differentiated interest rates to different countries, and could altogether refuse to lend to some countries.
The issuer country would likely be prone to the same vicious circle of: rising interest rates - overvaluation of the currency - trade deficit expansion - production base erosion - rising indebtedness - bubbles - crisis - print money - surrender the reserve currency status to a contender, BUT.. this is in a "free market" economy with a powerful electorate. The electorate would be temped to live on borrowed money (why work if I could borrow against our strong currency), and the politicians would have to give in. If however, the issuer country is capable to impose discipline on the population/electorate, than it would have an opportunity to try and carry on a FX/interest rate policy so as to keep the production base intact and the trade balance in check. In other words, the country will make its workers sweat for a smaller piece of pie, but will hold them employed. (China?)
2. With regard to the cause and effect relationship between the reserve currency demand and trade deficit expansion:
The Chinese primary objective should have been building a strong production base rather than accumulation of reserves. There was no demand for the FX reserves as such on their part actually, at least not on such a huge scale as it looks when reviewing the reserves amounts. Their accumulation was incidental to their industrialization policy. So was the US trade deficit expansion. The Chinese FX reserves is the price that they paid for the industrialization - they financed all sorts of deficits of the consumer countries by these reserves.