Dooley, Michael, David Folkerts-Landau, and Peter Garber. "The Revived Bretton Woods System". International Journal of Finance and Economics, Vol.9, No.4 (2004): 307-313.

Dooley, Michael, David Folkerts-Landau, and Peter Garber. "The Revived Bretton Woods System". International Journal of Finance and Economics, Vol.9, No.4 (2004): 307-313.

• Under the initial Bretton Woods systems, the USA constitute the center of the global economic system with uncontrolled capital and goods markets, while Europe and Japan constituted a developing periphery. These peripheral countries adopted economic strategies based on undervaluing their currencies, controlling capital and trade flows, and accumulating US dollar reserves, during which time the US lent money to the periphery on a large scale, primarily through foreign direct investment (307).
• Once the peripheral countries had accumulated enough capital, they moved to the center of the economic system and abandoned previous policies of controlled exchange rates and accumulation of US dollar reserves, especially since this policy had allowed the US to profit from European and Japanese use of the US dollar and American financial services (307).
• This system worked in that the US provided the dollar as reserves to peripheral countries so they could accumulate capital, but it is based on those peripheral counties not having monetary policy control over the value of their own reserves and underwriting US debt through the accumulation of those reserves (307-308).
• The end of this first periphery by the 1970s was not a permanent change in the global economic system, but a temporary period during which no state choose to adopt export-led growth as a development strategy, largely because most developing countries experimented with some form of planned economy during the 1970s and 1980s (308).
• Peripheral countries do not blindly engage in an economic strategy that leaves them with US dollar reserves, but instead choose this as a way to develop economically and accumulate capital reserves through a successful export industry. These benefits are more valuable than control over currency reserves in that given situation with limited options (308).
• For this strategy to be successful, peripheral countries need to adopt capital controls to make sure that domestic capital stocks accumulated by trade stay and are reinvested domestically (308).
• After the collapse of Communism in the late 1980s, the new center of the global economy, with open capital and goods markets, was based in the USA, Japan, and Europe. Part of the new periphery were developing and ex-communist countries with poor capital stocks and uncompetitive goods. These countries primarily followed the Washington Consensus and opened their markets in an attempt to immediately join the economic center. The other peripheral countries were Asian states who decided to adopt the same economic strategy as Europe and Japan did in the 1950s, promoted exports, undervaluing their exchange rates, and accumulating currency reserves (308).
• Similar to the Europeans and Japanese in the 1950s, the Asian states of the 1990s and beyond have been successful in their economic development based on this strategy and have become a major force in the global economic system (308).
• It is expected that, like the Europeans and Japanese before them, the peripheral Asian counties will eventually reach a stage of economic development where they will abandon this economic model, join the economic center, and adopt floating currency regimes. But this is unlikely to happen before the 2010s, if not later (308). Additionally, the success of these peripheral Asian countries means that they will likely be copied by a new group of peripheral states, like India (308, 312).
• Other states will need to choose to either follow the recommendations of the IMF and try to join the global center by pursuing free trade and floating currency exchange rates or adopt the Asian model of capital controls, undervalued exchange rates, and export-led growth. Most developing countries, particularly Latin America, are likely to choose the second option (312).
• The ability of the USA to maintain such large current accounts deficits, while at the same time remaining a major site of investment and seeing declining yield rates for US bonds, is due to its central role in a new Bretton Woods-style system. The USA would have to make major adjustments to its budget deficits if global financial markets were open, but different rules apply due to the periphery in the global financial system (309).
• There are three economic and currency zones in the world: a central zone consisting of the USA, a trade account zone in Asia, and a capital account zone in Europe, Australia, and the rest of the Americas (309).
• The trade account countries of Asia focus on exporting to the USA to maintain economic growth rates. If exports to the USA begin to decline, the governments of these countries will use their dollar earnings to buy US debt -- even if it carries low returns or high risk -- and thus underwrite further consumption of their exports (309, 311).
• These states all intervene to limit the appreciation of their currencies to retain their export competitiveness to the USA (310).
• The capital account countries of Europe, Australia, and the Americas are interested in the viability, risk, and return on investment of US bonds and other US debt. Moreover, capital inflows to the USA are largely private. Their currency values, which float and usually have little government interference, are likely to change as they become more concerned by rising US debt levels (310).
• The USA plays a unique role in the global financial system because it invests like the capital account countries, being concerned about risk and return on investment rather than economic development, but benefits from and supports its relationship with the trade account countries. Investment from these trade account countries gives the USA access to greater capital resources with which to invest in its own economic development (310).
• The US current account deficit has driven global growth since the 1990s, increasing from $130 billion in 1997 to over $400 billion in 2002. These deficits have been financed by private investment from the capital account countries and government investment from the trade account countries (310).
• Thus far, the new Bretton Woods system has been stable, despite rising indebtedness in the USA. The stability of this system is, however, imperiled as time goes on the threat of the USA being unable to cover its debts to Europe and Asia (311).
• If rising US debt lead European and capital account investors to withdraw their funds from the USA, they would be replaced by Asian buyers. This means that US bond yields are likely to decline, not rise, without a significant effect on capital flows to the USA. In an extreme case, Asian buyers might even buy out European debt holders to prevent a depreciation of the US dollar and thus maintain the current economic system (311).
• The increasingly peripheral nature of capital account countries to this relationship between the USA and Asia is demonstrated by the fact that American stock markets have risen in value and US bond yields decreased despite the depreciation of the US dollar against the euro (311).
• Other tensions within the system are worries that artificially undervalued currencies will eventually create inflation, although this effect is thus far minor, and growing complaints in the USA about Asian currency practices creating an unfair trade relationship for US companies (311-312).
• Theoretically, Asian counties should shift their exports to Europe or other regions, but these regions are not open to goods nor free with their capital markets in the way that the USA is. Moreover, Europe is focused on absorbing Eastern Europe and has structural issues with its handling of debt and financial markets that make it unappealing to Asian exporters (312). 
• Withdrawing their investments from US markets is actually one of the worse decisions that capital account countries can make since worries about US indebtedness are misplaced due to Asian structural interest in US debt assets. Reducing their US assets will only cause the euro and other capital account zone currencies to appreciate against the dollar, making those exports less competitive versus Asian and US products and likely leading to a structure trade deficit towards Asia and the USA (312). 
• "If European investors, looking objectively at growing US debt alone, prudentially limit their US positions and demand better risk/return characteristics before supplying more capital to the USA, the euro will appreciate dramatically. Local savings will stay in Europe, depressing yields there. Asia will grow even faster as it displaces European goods in the USA; Europe will grow even more slowly. Yields in the USA will not be forced up even as the US current account deficit grows; the dollar falls against the euro and private capital inflows from Europe and other capital account countries fall off" (312).