Preface
For decades, economists and lawmakers have described the dollar's global dominance as America's 'excess privilege'—a jewel in the crown of American power, granting the U.S. unparalleled economic advantages on the world stage. We hear that other countries are also eyeing this status, plotting to overthrow the dollar and seize its privileged position.
However, reality tells a different story. The truth is far more complex than intuition suggests: while part of the U.S. economy—especially financial institutions and capital markets—benefits immensely from reserve currency status, these benefits are highly concentrated, while the costs are widely distributed across the nation. This structural imbalance makes the role of reserve currency fundamentally unsustainable in the long term, regardless of who the holder is. What seems like a privilege, upon closer examination, reveals itself to be a gilded cage—it brings advantages accompanied by severe structural costs.
The implicit burden of reserve status
The fundamental issue of the reserve currency status is reflected in what economists call the 'Triffin Dilemma,' named after Belgian economist Robert Triffin, who introduced the concept in the 1960s. At its core is an irreconcilable conflict: in order to provide the world with enough dollars for international trade and reserves, the United States must run persistent trade deficits, essentially exporting dollars in exchange for goods.
These deficits, while crucial for global monetary stability, have gradually eroded the U.S. domestic manufacturing base, labor market, and the economic foundations that initially made the dollar attractive. The reserve currency issuer finds itself caught between domestic and international priorities, a contradiction that cannot be permanently resolved but can only be managed at increasing costs.
The most obvious consequence is the dramatic hollowing out of American manufacturing. Since the collapse of the Bretton Woods system in 1971, when the dollar became the undisputed reserve currency, the U.S. has undergone a profound industrial transformation. The share of manufacturing in GDP has fallen from about 25% in the 1960s to less than 12% today. Entire regions that were once dedicated to production have been hollowed out, forming the notorious 'Rust Belt,' accompanied by profound social upheaval.
It is little known that this transformation is not a policy failure but an inevitable structural consequence of the dollar's global role. When a country's currency becomes the world's primary reserve asset, that country must mathematically consume more than it produces and import more than it exports. The result is a slow deindustrialization under the guise of consumption-driven prosperity.
Considerations for export powerhouses
It is commonly believed that export powerhouses like Germany, Japan, and China would eagerly seize reserve currency status if given the chance. Their economic strategies center on export-driven growth, accumulating massive trade surpluses and foreign exchange reserves. Surely they want their currency to occupy the privileged position of the dollar?
However, these countries have consistently exhibited a peculiar hesitation to promote their currencies as true alternatives to the dollar. Even when China talks about the internationalization of the renminbi, its actual policies remain cautious and limited in scope.
This hesitation is not coincidental—it reflects a clear awareness of the associated costs. For export-oriented economies, the reserve currency status would be devastating to the economy. The increase in demand for their currency would drive up its value, making exports more expensive and imports cheaper. The resulting trade deficit would undermine the export-driven model that supports their economic development.
Japan's experience in the 1980s provides a cautionary tale. As the yen began to internationalize and appreciate, Japanese lawmakers grew concerned about its impact on the export sector. The Plaza Accord in 1985 led to a significant appreciation of the yen, ultimately ending Japan's economic miracle and ushering in its 'Lost Decade.' China, closely observing this period in history, is understandably reluctant to repeat the mistakes.
For these countries, the current arrangement offers a better alternative: they can maintain an undervalued currency to promote exports while reinvesting dollar surpluses into U.S. Treasury bonds, effectively lending money to Americans to purchase their products. This dollar recycling allows them to maintain export advantages while funding the U.S. consumption that drives their economic growth.
At the same time, they are spared the burden of providing global liquidity, managing international financial crises, or struggling with the contradictions between domestic demands and international responsibilities. They enjoy the benefits of the dollar system without bearing its costs.
America's growing hesitation
Perhaps the most convincing evidence that the reserve currency status is not as richly rewarding as depicted comes from the United States itself. An increasing number of U.S. lawmakers from various political factions are questioning whether the 'excess privilege' is worth its domestic costs.
The Trump administration has explicitly expressed this shift. Trump's tariff policies were announced with greater vigor in his second term, directly challenging the mechanisms that maintain dollar hegemony. By imposing a broad 10% tariff on all imported goods (with higher rates for specific countries), the Trump administration is effectively signaling that America is no longer willing to sacrifice its industrial base for reserve currency status.
When Trump declared that 'tariffs are the most beautiful word in the dictionary,' he symbolized a profound shift in American priorities. The goal is clear: to reduce the trade deficit, even at the cost of undermining the mechanisms that maintain dollar dominance.
This is not merely an abnormality of Trump. Trade skepticism has increasingly become a bipartisan consensus, with prominent figures from various political factions questioning the orthodox view of free trade and its impact on American workers. For decades, maintaining dollar hegemony could be justified as rational in the face of domestic deindustrialization, and this consensus is now wavering in the minds of both parties.
Asymmetric benefits
To understand why the current system persists despite no one being willing to occupy a core position, we must recognize the asymmetric benefits it creates for different participants.
For emerging economies, the dollar system provides a matured development path. By maintaining an undervalued currency and focusing on exports, countries from South Korea to Vietnam have propelled their industrial development. Manufacturing employment has laid the foundation for a growing middle class, while technology transfer has accelerated modernization. These countries have been willing to accept dollar dominance as the entry cost of this development model.
For financial centers like Switzerland, Singapore, and the UK, the dollar system creates lucrative opportunities without bearing the full burden of reserve currency status. They can participate in the global dollar market, provide financial services for dollar liquidity, and capture enormous value without suffering the manufacturing decline faced by the primary reserve currency issuer.
At the same time, for the U.S., the costs are partially masked by the benefits to consumers. Americans enjoy low prices on imported goods, convenient credit, and lower interest rates than in other circumstances. The finance sector centered in New York captures enormous value by managing global dollar flows. These apparent benefits historically outweighed the less obvious but profound cost of industrial hollowing.
Escaping the past
History tells us that no single reserve currency can last forever. From the Portuguese real to the Dutch guilder to the pound, every global currency ultimately yielded to the erosion of the economic foundations that supported it. The current predicament of the dollar suggests that this historical pattern continues.
The uniqueness of our current moment lies in the fact that no country seems eager to take on this burden. The most frequently mentioned potential successor, China, has shown significant hesitation towards the full internationalization of the renminbi. The euro project in Europe remains incomplete in the absence of a fiscal union. Japan and the UK lack the necessary economic scale.
This collective hesitation has created an unprecedented situation: the primary reserve currency shows signs of exiting its role, but no obvious alternative is ready.
Trump's radical tariff policies could accelerate this transition. By prioritizing domestic industries over international financial arrangements, the government is effectively signaling that the U.S. will no longer accept the structural trade deficits required of a reserve currency issuer. However, without these deficits, the world may face a dollar shortage, which could severely limit global trade and finance.
Seeking a new balance
If the current reserve currency arrangement has become unsustainable, what will happen next? More importantly, how chaotic will this transition be?
We should acknowledge that transitioning from one global monetary order to another is often chaotic in history, frequently accompanied by financial crises, political turmoil, and sometimes even wars. The shift from the pound to the dollar was neither planned nor orderly—it emerged amid the chaos of two world wars and the Great Depression. We should expect that any future transition will be no less tumultuous unless we consciously design for stability.
The most frequently discussed alternative is a multipolar currency system in which several major currencies share reserve status. This would distribute the benefits and burdens across multiple economies, potentially alleviating the pressure on any one country to maintain excessive deficits.
However, a multipolar system will bring its own challenges. Liquidity fragmentation will increase transaction costs and complicate crisis response. Coordination issues among competitive monetary authorities will intensify during financial stress periods. Most importantly, this approach simply shifts the Triffin dilemma onto multiple shoulders without addressing its core fundamental contradiction.
Principles of an ideal alternative
Rather than focusing on specific implementation plans, let us consider what principles the ideal reserve system and its transformation should follow—one that can address the core paradox: the costs associated with reserve currency status are burdens no country is willing to bear.
1. Collective governance rather than unilateral control
The fundamental issue of national currencies as reserve assets is the inevitable conflict between domestic demands and international responsibilities. An ideal system would separate these functions while allowing nations to continue as stakeholders in system governance.
This does not mean that countries will become powerless—in fact, quite the opposite. They will gain a more meaningful collective influence within a system that directly serves shared interests, rather than being subject to the domestic political pressures of a single country. Neutrality does not mean abandoning national participation; it means changing the manner of participation.
2. Principle-based supply management
The current system actually contains a key feature worth preserving: the capacity to expand the monetary stock and export to meet global demand. This capacity for expansion is crucial for the functioning of the global economy. The issue is not the expansion itself but who bears the costs of that expansion and how it is governed.
The ideal system will retain this capacity for expansion while adding what is currently lacking in the system: symmetric contractions at the appropriate times. This balanced approach will preserve the advantages of today's system while addressing its structural weaknesses.
This is not about inventing entirely new mechanisms but implementing principles that have been understood for decades but have failed to be enacted due to political constraints.
3. Absorptive transition rather than replacement
Perhaps the most important principle is that any viable alternative must absorb rather than attack the current system. The approximately $36 trillion of U.S. debt held by entities cannot simply be discarded, as it would cause catastrophic damage to the global economy.
The ideal system will create sustained demand for these assets during the transition period, allowing for gradual evolution rather than destructive revolution. This is not about harming any country's interests but ensuring continuity during the system's evolutionary process.
The current reserve currency issuer (the United States) will actually benefit from this approach—gaining the ability to rebalance its economy towards production without triggering a debt market collapse that harms everyone's interests.
4. Crisis resilience design
Financial crises are inevitable. What matters is how the system responds to these crises. The current arrangements largely rely on the discretionary intervention of central banks (especially the Federal Reserve), and political considerations often influence the timing and scale of interventions.
The ideal alternative will incorporate predetermined, transparent mechanisms to stabilize markets during periods of stress—providing emergency liquidity, preventing panic chain reactions, and ensuring that critical markets can function normally even when personal interests might drive destructive behavior.
Importantly, this approach does not eliminate the discretionary crisis management at the national level. Sovereign currencies will retain their full crisis management toolkit—central banks can still conduct emergency operations, implement unconventional monetary policies, or respond to domestic financial pressures as needed. The difference is that the international reserve layer will operate with more predictable, rules-based mechanisms, reducing reliance on single-country decisions to maintain global stability. This creates a complementary dual-layer system: predictable international coordination coexists with flexible national responses, each playing its role.
5. Managed appreciation trajectory
Notably, a stable but controlled appreciation of a reserve asset brings certain benefits to the entire system. It will create natural incentives for central banks to gradually increase their holdings while still allowing export-driven economies to function normally. Since these export economies have managed their currency in relation to the dollar, they can continue this practice with new reserve assets.
Transition
The most dangerous period in monetary evolution is the transition phase. Here, design aimed at achieving stability is crucial. The transformation may go through several different stages:
Initial adoption: Starting from complementary coexistence rather than replacement, the new system will build credibility while minimizing disruption.
Reserve diversification: Various institutions, especially central banks, will gradually incorporate new assets into their reserves, thereby reducing dollar concentration without triggering market panic.
Settlement function development: As liquidity and adoption increase, the system can increasingly serve the settlement function of international trade.
Mature equilibrium: Ultimately, a new balance will emerge where national currencies retain their domestic functions while international functions shift to a more neutral system.
In this process, the dollar will retain its importance—just gradually shedding the unbearable burden of serving both domestic and international demands. This represents evolution rather than revolution.
Transition challenges
No matter how well designed, transitioning from the current dollar-centered system faces enormous challenges. The dollar is deeply entrenched in global trade, financial markets, and central bank reserves. Sudden changes could trigger currency crises, debt defaults, and market failures, leading to devastating consequences for humanity.
Responsible transitions require building bridges between systems rather than destroying them. Those advocating for revolutionary approaches to dollar collapse may inadvertently create the economic disasters that the monetary system was supposed to avoid. Despite its many flaws, billions of people still rely on its continued operation, even as alternatives are developed.
The most viable path forward is gradual evolution rather than sudden revolution. The new system must prove its advantages through practicality rather than ideology, gaining adoption through positive incentives rather than coercive disruptions.
Prosperity considerations
The ultimate criterion for assessing any currency system is not the purity of its ideology but its actual impact on human prosperity. The asymmetric benefits and burdens created by the current reserve currency arrangement are increasingly unsustainable. A well-designed alternative could create a more balanced prosperity through the following ways:
Allowing the U.S. to achieve production rebalancing without triggering a currency crisis
Providing export countries with a more predictable monetary environment, avoiding political complications
Protecting emerging markets from collateral damage caused by policies designed for other economies
Reducing geopolitical tensions arising from financial weaponization
The prosperity issue ultimately revolves around balancing stability, adaptability, and fairness—creating a system that provides sufficient predictability for long-term planning while adapting to a changing environment and distributing benefits more equitably than the current system.
Conclusion: No single country can bear the burden alone
The truth about reserve currency status contains important nuances. It is not that no one wants it—certain parts of the financial sector would certainly benefit and thus support it. More precisely, the benefits are concentrated while the costs are distributed across a broader economy. This inherent structural imbalance makes it unsustainable in the long run, regardless of which country bears the burden.
Trump's policies indicate that the U.S. may no longer be willing to bear these dispersed costs to maintain its global role. However, the system has persisted because, despite its flaws, everyone relies on someone to fulfill these functions.
The historical irony is that after decades of other countries being accused of 'manipulating' their currencies to escape the dollar's role, the United States itself may be the country that ultimately sheds the burden of reserve currency status. This brings both dangers and opportunities—the danger of a disorderly transition and the opportunity to design a fundamentally better system.
The challenges we face are not only technical but philosophical—redesigning the foundations of global finance to serve human prosperity rather than national interests. If we succeed, we may ultimately resolve this paradox: no single country can sustainably provide the fundamental global currency functions.
This article is reprinted with permission from: (Deep Tide TechFlow)
Original author: Zeus
'The Twilight of Dollar Hegemony: Reserve Currency No Longer a Privilege! Is the Global Monetary System Facing Reconstruction?' This article was first published in 'Crypto City'
