Our Dollar, Your Problem by Kenneth Rogoff Seven Turbulent Decades of Global Finance, and the Road Ahead
What's it about?
Our Dollar, Your Problem (2025) examines how the US dollar achieved global dominance through a combination of strategic positioning and fortunate circumstances, while demonstrating that this supremacy is increasingly vulnerable to challenges from cryptocurrencies, China's yuan, and America's own fiscal overconfidence.
What exactly is the deal with dollar dominance? The US dollar’s extraordinary post-war dominance became markedly clear in 1971, when Nixon suspended the convertibility of US dollars to gold. This blindsided European leaders who had been repeatedly assured that the US dollar was as good as gold. When furious European officials confronted then-Treasury Secretary John Connally about this betrayal, he delivered his now-famous retort: “Our dollar, your problem.”
This cavalier attitude exemplifies how strong dollar theory – the idea that a powerful dollar benefits everyone by providing global stability – has created significant economic challenges for Europe and other economies. It’ss also generated substantial problems within the US itself, including manufacturing job losses due to an overvalued currency and widening trade deficits.
Will complacency around the strong dollar spur further financial instability outside US markets and within them? Possibly. In this lesson, you’ll find out how it could happen.
The title of world’s dominant currency isn’t like a grand slam trophy or a world wrestling title: it doesn’t change hands that often. It usually changes hands once every few centuries, and even then there’s a bit of overlap where waning and nascent currencies coexist as dominant forces. In seventeenth century Europe, the Netherlands was dominant, partly thanks to innovation of silver-coin-backed bank notes – florin – circulating alongside actual coins –guilder. The sixteenth century was all about Spanish pieces of eight, while the British pound sterling was unshakeable between the Napoleonic Wars to the start of WWI. By this metric, the current dominant currency, the USD, is in late middle age.
How did the USD come to dominate? A breathtaking postwar run. At Bretton Woods, New Hampshire, in 1944, world leaders created a post-war system of fixed exchange rates, where currencies were pegged to specific values rather than floating freely in markets. The system placed the strong USD at its centre and obliged other countries to fix their exchange rates to the dollar, giving the USD extraordinary privilege as the global anchor currency. In 1950, the US economy accounted for a wildly high 36 percent of global GDP – a staggering concentration of economic power.
Today, the USD is the lingua franca of global trade markets. And as the world has globalized, the impact of what it means to be the dominant currency has grown ever more outsized. No-one in Japan cared much about Dutch florins in the seventeenth century, but the Japanese are extremely interested in how the USD performs in the present day.
Network effects ensure international currency usage becomes a monopoly: it would be chaotic to use all 150+ world currencies, so many naturally fall by the wayside. About 90 percent of international currency transactions involve USD on one side or another because it’s simply cheaper to use the dollar as a vehicle currency – rather than converting yen to euros directly, banks route through dollars for better liquidity and lower costs. Almost 60 percent of foreign exchange reserves – the stockpiles of currencies that central banks hold for international transactions and crisis management – are held in USD. International goods and assets are often priced in USD, with roughly 80 percent of oil priced in dollars.
Picture the D-Day celebrations in 1944 – Allied forces triumphant, flags waving, revellers in the streets. This moment marked not just the end of the war, but also the astonishing rise of the USD to global dominance. Between then and now, though, this position has faced serious challengers.
The Soviet ruble presents perhaps the most surprising case. Post-collapse, it seems absurd that the ruble could have toppled the dollar, but in the 1970s many economists believed parity was a real possibility. The USSR boasted fast growth and impressive infrastructure: massive dams, nuclear power plants, and space programs that captured global imagination. But could a centrally planned system really compete with market capitalism? The boom years were fueled by large-scale infrastructure projects that proved unsustainable. The crucial inflection point came in 1964 when Brezhnev attempted to rationalize the system and bring it more in line with market principles. Had he succeeded, the ruble might have genuinely contended with the USD.
Japan’s yen tells a different story of dramatic rise and fall. Japan’s post-war economic miracle saw GDP growth rates averaging 10 percent annually through the 1960s, driven by manufacturing excellence, technological innovation, and aggressive export strategies. By the 1980s, Japanese companies dominated electronics, automobiles, and steel production. But US pressure forced Japan to adopt a stronger yen more quickly than the economy could handle. The Plaza Accord of 1985 – a coordinated agreement between the US, Japan, Germany, France, and Britain to weaken the dollar against other major currencies – was designed to reduce America’s massive trade deficit with Japan. The accord caused the yen to double in value within two years, making Japanese exports suddenly expensive and uncompetitive. The moment to challenge USD dominance passed, and while the yen remains stable, not one country in the world pegs its currency to it.
The euro represented Europe’s most ambitious attempt at currency unification. Launched in 1999, it combined the economic might of Germany, France, and other major economies into a single monetary unit, backed by the world’s largest trading bloc. The euro’s strengths were obvious – deep capital markets, low inflation credibility inherited from the Deutsche Mark, and massive economic scale rivaling the United States. For a time, the strong euro genuinely looked set for parity with the USD, rising from $0.85 at launch to $1.60 by 2008. Then came Greece’s financial crisis in 2010. Years of excessive borrowing, hidden deficits, and fiscal mismanagement exposed the euro’s fatal flaw. Without fiscal union to match monetary union, member countries couldn’t coordinate responses effectively. The crisis revealed that the eurozone lacked the political integration necessary to manage asymmetric economic shocks, fundamentally undermining confidence in the entire project and its challenge to dollar dominance.
Two forces in particular are shaking the foundations of American monetary hegemony: China’s yuan and the rise of cryptocurrencies. Both represent fundamentally different approaches to unseating the greenback, and both carry profound implications for global finance.
China’s challenge is perhaps the most systematic and deliberate. Beijing has been methodically building the infrastructure for yuan internationalization through initiatives like the Belt and Road program, which finances massive infrastructure projects across Asia, Africa, and Latin America – often with loans denominated in yuan rather than dollars. China has also established currency swap agreements with dozens of countries, allowing direct trade without converting through dollars first. The digital yuan represents another strategic move – a central bank digital currency that could potentially bypass the dollar-dominated SWIFT payment system entirely. China’s economic scale makes this credible: it’s the world’s second-largest economy and largest trading partner for over 120 countries. When China and Russia conduct energy trades in yuan, or when Saudi Arabia considers accepting yuan for oil payments, these aren’t just economic transactions – they’re geopolitical statements.
Cryptocurrencies pose a different but equally disruptive challenge. Bitcoin and other digital assets operate entirely outside traditional banking systems, offering a decentralized alternative to government-controlled currencies. While crypto markets remain volatile and relatively small compared to traditional forex markets, their 24/7 global nature and resistance to capital controls appeal to countries seeking alternatives to dollar dependency. El Salvador’s adoption of Bitcoin as legal tender, while economically questionable, signals growing appetite for monetary alternatives. Stablecoins – cryptocurrencies pegged to existing currencies – already facilitate billions in cross-border transactions without traditional banking intermediaries.
Neither crypto nor the yuan has yet achieved the network effects and institutional trust that cement currency dominance, but both represent genuine alternatives to dollar hegemony.
For most of the world, the goal isn’t to compete with the US dollar. It’s to live with it. And one of the most popular strategies has been pegging their own currencies directly to the greenback through fixed exchange rate systems.
The logic seems straightforward: tie your currency to the world’s most stable reserve currency and import that stability. Countries peg by promising to exchange their currency for dollars at a fixed rate, requiring central banks to hold massive dollar reserves to defend that promise. In the short and medium term, this can work brilliantly – it reduces exchange rate volatility, makes international trade more predictable, and can help control inflation by importing US monetary credibility. But these systems are inherently fragile and can collapse dramatically when economic fundamentals diverge too far from the peg.
Take Mexico’s bold experiment in 1988. Facing hyperinflation that reached a staggering 159 percent, Mexico implemented a one-sided currency peg, fixing the peso to the dollar at increasingly predetermined rates. Initially, it worked like magic – inflation plummeted from triple digits to single digits within a few years, and foreign investment poured in. But by 1994, Mexico’s current account deficit had ballooned to 8 percent of GDP, and the peso was clearly overvalued. When the government finally abandoned the peg in December 1994, the peso collapsed by over 50 percent in a matter of weeks, triggering a severe recession.
Thailand’s experience in the 1990s tells a similar story. The Bank of Thailand maintained a peg of roughly 25 baht per dollar throughout the early 1990s, which helped fuel the “Asian Tiger” economic boom. But as Thailand’s economy overheated – property bubbles inflated and current account deficits reached 8 percent of GDP by 1996 – the peg became unsustainable. When speculators led by George Soros attacked the baht in July 1997, Thailand’s foreign reserves evaporated in days, forcing devaluation and sparking the broader Asian Financial Crisis.
Fixed exchange rate systems create a fundamental vulnerability: they work until they don’t, and when they fail, the economic consequences are often catastrophic. They leave both the US and pegging countries exposed – America inherits responsibility for global monetary stability it never explicitly accepted, while other nations sacrifice monetary policy independence for the illusion of stability that can vanish overnight.
There are real risks inherent to US dollar dominance – both to America, which faces the burden of being the world’s banker and the risk of currency overvaluation hurting exports, and to the wider world, which suffers from imported US monetary policy and vulnerability to American financial sanctions. So why doesn’t the US simply walk back its position? Simply put, because it judges the perks to outweigh the risks. Let’s take a closer look at those perks.
The most spectacular advantage is that foreign countries are willing to hold enormous amounts of US debt. By mid-2024, foreign central banks held $6.7 trillion in US Treasury bills – a figure that rises to $8.2 trillion when you include private investors. Why are they so willing? Because dollars are the world’s safest store of value and most liquid asset. This creates what economists call “exorbitant privilege” – the US can borrow at lower interest rates than any other country, essentially getting the world’s cheapest credit card. American consumers and businesses benefit from artificially low borrowing costs, while the government can finance massive spending programs without the typical constraints faced by other nations.
This arrangement has emboldened the US to embrace deficits that would terrify other countries. Recent presidents from Bush to Obama to Trump to Biden have run trillion-dollar deficits without facing the balance-of-payments crises that plague other nations. Here’s why: the US doesn’t face typical foreign exchange constraints because its imports are purchased in its own currency. When America buys oil from Saudi Arabia or electronics from China, those transactions happen in dollars – meaning the US essentially pays for foreign goods with IOUs it can print itself.
Dollar dominance also translates to raw geopolitical power, particularly the ability to impose devastating financial sanctions. When the US cuts countries off from dollar-based payment systems, it can cripple entire economies without firing a shot – as Russia discovered after invading Ukraine.
The system also generates massive capital inflows into US markets, as foreign investors seeking dollar exposure pump money into American stocks, bonds, and real estate. This influx stimulates economic growth, though it can create dangerous asset bubbles.
Perhaps most importantly, the Federal Reserve enjoys unprecedented monetary policy autonomy. Unlike other central banks that must constantly worry about capital flight or exchange rate crises when setting interest rates, the Fed can focus primarily on domestic conditions.
Do these rewards outweigh the risks? For now, American policymakers clearly think so. But this calculation could change as challengers emerge and the costs of global responsibility mount.
What potential risks and challenges lie in wait for the US dollar? The threats are more serious than many Americans realize, and they stem from vulnerabilities baked into the very system that created dollar supremacy.
Inflation represents the most immediate danger. The Federal Reserve’s commitment to keeping inflation relatively stable serves as the key bulwark between prosperity and market turmoil. But Fed independence isn’t set in stone, and there are factors the Fed can’t manage. Factors like political pressure created by unsuitable fiscal policies, geopolitical pressures to hold down interest rates despite inflationary risks, or administrations that prioritize short-term growth over long-term stability. The stock market despises high real interest rates because they make bonds more attractive than stocks and increase borrowing costs for companies. Consumers love low rates because they make mortgages, car loans, and credit cards cheaper. These pressures create dangerous incentives to keep rates artificially low.
American inflation history shows how quickly things can spiral. The 1970s saw inflation reach double digits, peaking at 13.5 percent in 1980, as oil shocks combined with loose monetary policy and fiscal profligacy. It took painful interest rate increases above 20 percent to break the cycle, triggering severe recession but restoring credibility. If unchecked inflation returned today, it would devastate dollar dominance. Foreign central banks holding trillions in dollar reserves would watch their wealth evaporate in real terms, potentially triggering a massive flight from dollar assets.
US debt levels compound this vulnerability. Federal debt now exceeds $33 trillion – over 120 percent of GDP – with no realistic plan for reduction. As debt accumulates, servicing costs consume ever-larger portions of the federal budget. When interest rates rise, these payments explode exponentially. This creates a fiscal trap: the government faces increasing pressure to keep rates low and avoid debt crisis, but low rates during inflationary periods fuel even more inflation. It’s a ticking time bomb that could force the Fed to choose between defending the currency and preventing government bankruptcy.
The ripple effects of a destabilized dollar would be catastrophic. International trade would fragment as countries scrambled for alternatives. The very network effects that created dollar dominance could rapidly reverse, as confidence – the ultimate basis of any currency’s power – evaporated. America’s exorbitant privilege could become an unbearable burden virtually overnight.
In this lesson to Our Dollar, Your Problem by Kenneth Rogoff, you’ve learned that the US dollar’s global dominance since WWII has created a system where America benefits enormously – cheap borrowing, deficit spending without typical constraints – while other countries must either compete with or adapt to dollar supremacy. However, this dominance faces serious future threats from rising debt levels and potential inflation that could trigger a rapid collapse in global confidence and end the dollar’s privileged position.
Our Dollar, Your Problem (2025) examines how the US dollar achieved global dominance through a combination of strategic positioning and fortunate circumstances, while demonstrating that this supremacy is increasingly vulnerable to challenges from cryptocurrencies, China's yuan, and America's own fiscal overconfidence.
What exactly is the deal with dollar dominance? The US dollar’s extraordinary post-war dominance became markedly clear in 1971, when Nixon suspended the convertibility of US dollars to gold. This blindsided European leaders who had been repeatedly assured that the US dollar was as good as gold. When furious European officials confronted then-Treasury Secretary John Connally about this betrayal, he delivered his now-famous retort: “Our dollar, your problem.”
This cavalier attitude exemplifies how strong dollar theory – the idea that a powerful dollar benefits everyone by providing global stability – has created significant economic challenges for Europe and other economies. It’ss also generated substantial problems within the US itself, including manufacturing job losses due to an overvalued currency and widening trade deficits.
Will complacency around the strong dollar spur further financial instability outside US markets and within them? Possibly. In this lesson, you’ll find out how it could happen.
The title of world’s dominant currency isn’t like a grand slam trophy or a world wrestling title: it doesn’t change hands that often. It usually changes hands once every few centuries, and even then there’s a bit of overlap where waning and nascent currencies coexist as dominant forces. In seventeenth century Europe, the Netherlands was dominant, partly thanks to innovation of silver-coin-backed bank notes – florin – circulating alongside actual coins –guilder. The sixteenth century was all about Spanish pieces of eight, while the British pound sterling was unshakeable between the Napoleonic Wars to the start of WWI. By this metric, the current dominant currency, the USD, is in late middle age.
How did the USD come to dominate? A breathtaking postwar run. At Bretton Woods, New Hampshire, in 1944, world leaders created a post-war system of fixed exchange rates, where currencies were pegged to specific values rather than floating freely in markets. The system placed the strong USD at its centre and obliged other countries to fix their exchange rates to the dollar, giving the USD extraordinary privilege as the global anchor currency. In 1950, the US economy accounted for a wildly high 36 percent of global GDP – a staggering concentration of economic power.
Today, the USD is the lingua franca of global trade markets. And as the world has globalized, the impact of what it means to be the dominant currency has grown ever more outsized. No-one in Japan cared much about Dutch florins in the seventeenth century, but the Japanese are extremely interested in how the USD performs in the present day.
Network effects ensure international currency usage becomes a monopoly: it would be chaotic to use all 150+ world currencies, so many naturally fall by the wayside. About 90 percent of international currency transactions involve USD on one side or another because it’s simply cheaper to use the dollar as a vehicle currency – rather than converting yen to euros directly, banks route through dollars for better liquidity and lower costs. Almost 60 percent of foreign exchange reserves – the stockpiles of currencies that central banks hold for international transactions and crisis management – are held in USD. International goods and assets are often priced in USD, with roughly 80 percent of oil priced in dollars.
Picture the D-Day celebrations in 1944 – Allied forces triumphant, flags waving, revellers in the streets. This moment marked not just the end of the war, but also the astonishing rise of the USD to global dominance. Between then and now, though, this position has faced serious challengers.
The Soviet ruble presents perhaps the most surprising case. Post-collapse, it seems absurd that the ruble could have toppled the dollar, but in the 1970s many economists believed parity was a real possibility. The USSR boasted fast growth and impressive infrastructure: massive dams, nuclear power plants, and space programs that captured global imagination. But could a centrally planned system really compete with market capitalism? The boom years were fueled by large-scale infrastructure projects that proved unsustainable. The crucial inflection point came in 1964 when Brezhnev attempted to rationalize the system and bring it more in line with market principles. Had he succeeded, the ruble might have genuinely contended with the USD.
Japan’s yen tells a different story of dramatic rise and fall. Japan’s post-war economic miracle saw GDP growth rates averaging 10 percent annually through the 1960s, driven by manufacturing excellence, technological innovation, and aggressive export strategies. By the 1980s, Japanese companies dominated electronics, automobiles, and steel production. But US pressure forced Japan to adopt a stronger yen more quickly than the economy could handle. The Plaza Accord of 1985 – a coordinated agreement between the US, Japan, Germany, France, and Britain to weaken the dollar against other major currencies – was designed to reduce America’s massive trade deficit with Japan. The accord caused the yen to double in value within two years, making Japanese exports suddenly expensive and uncompetitive. The moment to challenge USD dominance passed, and while the yen remains stable, not one country in the world pegs its currency to it.
The euro represented Europe’s most ambitious attempt at currency unification. Launched in 1999, it combined the economic might of Germany, France, and other major economies into a single monetary unit, backed by the world’s largest trading bloc. The euro’s strengths were obvious – deep capital markets, low inflation credibility inherited from the Deutsche Mark, and massive economic scale rivaling the United States. For a time, the strong euro genuinely looked set for parity with the USD, rising from $0.85 at launch to $1.60 by 2008. Then came Greece’s financial crisis in 2010. Years of excessive borrowing, hidden deficits, and fiscal mismanagement exposed the euro’s fatal flaw. Without fiscal union to match monetary union, member countries couldn’t coordinate responses effectively. The crisis revealed that the eurozone lacked the political integration necessary to manage asymmetric economic shocks, fundamentally undermining confidence in the entire project and its challenge to dollar dominance.
Two forces in particular are shaking the foundations of American monetary hegemony: China’s yuan and the rise of cryptocurrencies. Both represent fundamentally different approaches to unseating the greenback, and both carry profound implications for global finance.
China’s challenge is perhaps the most systematic and deliberate. Beijing has been methodically building the infrastructure for yuan internationalization through initiatives like the Belt and Road program, which finances massive infrastructure projects across Asia, Africa, and Latin America – often with loans denominated in yuan rather than dollars. China has also established currency swap agreements with dozens of countries, allowing direct trade without converting through dollars first. The digital yuan represents another strategic move – a central bank digital currency that could potentially bypass the dollar-dominated SWIFT payment system entirely. China’s economic scale makes this credible: it’s the world’s second-largest economy and largest trading partner for over 120 countries. When China and Russia conduct energy trades in yuan, or when Saudi Arabia considers accepting yuan for oil payments, these aren’t just economic transactions – they’re geopolitical statements.
Cryptocurrencies pose a different but equally disruptive challenge. Bitcoin and other digital assets operate entirely outside traditional banking systems, offering a decentralized alternative to government-controlled currencies. While crypto markets remain volatile and relatively small compared to traditional forex markets, their 24/7 global nature and resistance to capital controls appeal to countries seeking alternatives to dollar dependency. El Salvador’s adoption of Bitcoin as legal tender, while economically questionable, signals growing appetite for monetary alternatives. Stablecoins – cryptocurrencies pegged to existing currencies – already facilitate billions in cross-border transactions without traditional banking intermediaries.
Neither crypto nor the yuan has yet achieved the network effects and institutional trust that cement currency dominance, but both represent genuine alternatives to dollar hegemony.
For most of the world, the goal isn’t to compete with the US dollar. It’s to live with it. And one of the most popular strategies has been pegging their own currencies directly to the greenback through fixed exchange rate systems.
The logic seems straightforward: tie your currency to the world’s most stable reserve currency and import that stability. Countries peg by promising to exchange their currency for dollars at a fixed rate, requiring central banks to hold massive dollar reserves to defend that promise. In the short and medium term, this can work brilliantly – it reduces exchange rate volatility, makes international trade more predictable, and can help control inflation by importing US monetary credibility. But these systems are inherently fragile and can collapse dramatically when economic fundamentals diverge too far from the peg.
Take Mexico’s bold experiment in 1988. Facing hyperinflation that reached a staggering 159 percent, Mexico implemented a one-sided currency peg, fixing the peso to the dollar at increasingly predetermined rates. Initially, it worked like magic – inflation plummeted from triple digits to single digits within a few years, and foreign investment poured in. But by 1994, Mexico’s current account deficit had ballooned to 8 percent of GDP, and the peso was clearly overvalued. When the government finally abandoned the peg in December 1994, the peso collapsed by over 50 percent in a matter of weeks, triggering a severe recession.
Thailand’s experience in the 1990s tells a similar story. The Bank of Thailand maintained a peg of roughly 25 baht per dollar throughout the early 1990s, which helped fuel the “Asian Tiger” economic boom. But as Thailand’s economy overheated – property bubbles inflated and current account deficits reached 8 percent of GDP by 1996 – the peg became unsustainable. When speculators led by George Soros attacked the baht in July 1997, Thailand’s foreign reserves evaporated in days, forcing devaluation and sparking the broader Asian Financial Crisis.
Fixed exchange rate systems create a fundamental vulnerability: they work until they don’t, and when they fail, the economic consequences are often catastrophic. They leave both the US and pegging countries exposed – America inherits responsibility for global monetary stability it never explicitly accepted, while other nations sacrifice monetary policy independence for the illusion of stability that can vanish overnight.
There are real risks inherent to US dollar dominance – both to America, which faces the burden of being the world’s banker and the risk of currency overvaluation hurting exports, and to the wider world, which suffers from imported US monetary policy and vulnerability to American financial sanctions. So why doesn’t the US simply walk back its position? Simply put, because it judges the perks to outweigh the risks. Let’s take a closer look at those perks.
The most spectacular advantage is that foreign countries are willing to hold enormous amounts of US debt. By mid-2024, foreign central banks held $6.7 trillion in US Treasury bills – a figure that rises to $8.2 trillion when you include private investors. Why are they so willing? Because dollars are the world’s safest store of value and most liquid asset. This creates what economists call “exorbitant privilege” – the US can borrow at lower interest rates than any other country, essentially getting the world’s cheapest credit card. American consumers and businesses benefit from artificially low borrowing costs, while the government can finance massive spending programs without the typical constraints faced by other nations.
This arrangement has emboldened the US to embrace deficits that would terrify other countries. Recent presidents from Bush to Obama to Trump to Biden have run trillion-dollar deficits without facing the balance-of-payments crises that plague other nations. Here’s why: the US doesn’t face typical foreign exchange constraints because its imports are purchased in its own currency. When America buys oil from Saudi Arabia or electronics from China, those transactions happen in dollars – meaning the US essentially pays for foreign goods with IOUs it can print itself.
Dollar dominance also translates to raw geopolitical power, particularly the ability to impose devastating financial sanctions. When the US cuts countries off from dollar-based payment systems, it can cripple entire economies without firing a shot – as Russia discovered after invading Ukraine.
The system also generates massive capital inflows into US markets, as foreign investors seeking dollar exposure pump money into American stocks, bonds, and real estate. This influx stimulates economic growth, though it can create dangerous asset bubbles.
Perhaps most importantly, the Federal Reserve enjoys unprecedented monetary policy autonomy. Unlike other central banks that must constantly worry about capital flight or exchange rate crises when setting interest rates, the Fed can focus primarily on domestic conditions.
Do these rewards outweigh the risks? For now, American policymakers clearly think so. But this calculation could change as challengers emerge and the costs of global responsibility mount.
What potential risks and challenges lie in wait for the US dollar? The threats are more serious than many Americans realize, and they stem from vulnerabilities baked into the very system that created dollar supremacy.
Inflation represents the most immediate danger. The Federal Reserve’s commitment to keeping inflation relatively stable serves as the key bulwark between prosperity and market turmoil. But Fed independence isn’t set in stone, and there are factors the Fed can’t manage. Factors like political pressure created by unsuitable fiscal policies, geopolitical pressures to hold down interest rates despite inflationary risks, or administrations that prioritize short-term growth over long-term stability. The stock market despises high real interest rates because they make bonds more attractive than stocks and increase borrowing costs for companies. Consumers love low rates because they make mortgages, car loans, and credit cards cheaper. These pressures create dangerous incentives to keep rates artificially low.
American inflation history shows how quickly things can spiral. The 1970s saw inflation reach double digits, peaking at 13.5 percent in 1980, as oil shocks combined with loose monetary policy and fiscal profligacy. It took painful interest rate increases above 20 percent to break the cycle, triggering severe recession but restoring credibility. If unchecked inflation returned today, it would devastate dollar dominance. Foreign central banks holding trillions in dollar reserves would watch their wealth evaporate in real terms, potentially triggering a massive flight from dollar assets.
US debt levels compound this vulnerability. Federal debt now exceeds $33 trillion – over 120 percent of GDP – with no realistic plan for reduction. As debt accumulates, servicing costs consume ever-larger portions of the federal budget. When interest rates rise, these payments explode exponentially. This creates a fiscal trap: the government faces increasing pressure to keep rates low and avoid debt crisis, but low rates during inflationary periods fuel even more inflation. It’s a ticking time bomb that could force the Fed to choose between defending the currency and preventing government bankruptcy.
The ripple effects of a destabilized dollar would be catastrophic. International trade would fragment as countries scrambled for alternatives. The very network effects that created dollar dominance could rapidly reverse, as confidence – the ultimate basis of any currency’s power – evaporated. America’s exorbitant privilege could become an unbearable burden virtually overnight.
In this lesson to Our Dollar, Your Problem by Kenneth Rogoff, you’ve learned that the US dollar’s global dominance since WWII has created a system where America benefits enormously – cheap borrowing, deficit spending without typical constraints – while other countries must either compete with or adapt to dollar supremacy. However, this dominance faces serious future threats from rising debt levels and potential inflation that could trigger a rapid collapse in global confidence and end the dollar’s privileged position.
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