For decades, economists and policymakers have described the dollar’s global dominance as America’s “exorbitant privilege” — the jewel in America’s crown jewel that gives the U.S. unparalleled economic advantage on the world stage.
We hear that other countries are eyeing that status, too, plotting to overthrow the dollar and seize reserve currency status. The Hidden Burden of Reserve Status
The fundamental problem with reserve currency status is captured by what economists call the Triffin Dilemma, named after Belgian economist Robert Triffin, who coined the term 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 continually run trade deficits, essentially exporting dollars in exchange for goods.
These deficits, while essential for global monetary stability, have gradually eroded domestic manufacturing, the job market, and the economic foundations that made the dollar attractive in the first place. The reserve currency issuer is caught between domestic and international priorities, a contradiction that cannot be permanently resolved, only managed at ever-increasing costs.
The most obvious consequence has been the dramatic hollowing out of the U.S. manufacturing sector. Since the dollar became the undisputed reserve currency following the collapse of the Bretton Woods system in 1971, the United States has undergone a profound industrial transformation. Manufacturing has fallen from about 25% of GDP in the 1960s to less than 12% today. Entire regions once dedicated to production have hollowed out, forming the infamous “Rust Belt,” and the profound social unrest that has accompanied this transformation.
What is less well known is 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, the country mathematically must consume more than it produces and import more than it exports. The result is a slow deindustrialization under the guise of a consumption boom.
The Exporting Powerhouse
It is often assumed that export powerhouses like Germany, Japan, and China would eagerly seize reserve currency status if given the chance. Their economic strategies center around export-driven growth, which has allowed them to accumulate large trade surpluses and foreign exchange reserves. Surely they would like their currencies to occupy the dollar’s privileged position?
However, these countries have consistently shown a strange reluctance to promote their currencies as true alternatives to the dollar. Even as China talks about internationalizing the renminbi, its actual policies remain cautious and limited in scope.
This hesitation is not accidental—it reflects a clear understanding of the associated costs. For export-oriented economies, reserve currency status would be economically devastating. Increased demand for their currencies would push up their value, making exports more expensive and imports cheaper. The resulting trade deficits would undermine the export-driven model that has powered their economies.
Japan’s experience in the 1980s offers a cautionary tale. As the yen began to internationalize and appreciate, Japanese policymakers were wary of the impact on their export sector. The Plaza Accord of 1985 led to a sharp appreciation of the yen, which ultimately ended Japan’s economic miracle and ushered in its “lost thirty years.” China, which has watched this history closely, naturally does not want to repeat the same mistake.
For these countries, the current arrangement offers a better solution: They can maintain an undervalued currency to boost exports while reinvesting their dollar surpluses in U.S. Treasuries, effectively lending money to Americans to buy their products. This recycling of dollars enables them to maintain their export advantage while financing the U.S. consumption that drives their economic growth.
At the same time, they are freed from the burden of providing global liquidity, managing international financial crises, or struggling with the contradictions between domestic needs and international responsibilities. They enjoy the benefits of the dollar system without incurring its costs.
Growing U.S. hesitation
Perhaps the most telling evidence that reserve currency status is not the lucrative reward it is portrayed to be comes from the United States itself. An increasing number of U.S. policymakers, from across the political spectrum, are questioning whether the “exorbitant privilege” is worth its domestic costs.
The Trump administration has made this shift clear. Trump’s tariff policy, which has been reintroduced with greater force in his second term, directly challenges the mechanisms that maintain the dollar’s hegemony. By imposing a broad tariff of 10% on all imports (with higher rates for specific countries), the Trump administration is effectively signaling that the United States 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 signaled a profound shift in U.S. priorities. The goal was clear: reduce the trade deficit, even at the cost of undermining the mechanisms that maintain the dollar’s dominance.
This is not just Trump’s aberration. Trade skepticism has become increasingly bipartisan, with prominent figures across the political spectrum questioning the orthodoxy of free trade and its impact on American workers. The decades-old consensus that maintaining the dollar’s hegemony justified deindustrialization at home is crumbling on both the left and the right.
Asymmetric Benefits
To understand why the current system persists when no one wants to occupy the core position, we must recognize the asymmetric benefits it creates for different players.
For emerging economies, the dollar system offers a proven path forward. By maintaining undervalued currencies and focusing on exports, countries from South Korea to Vietnam fueled their industrial development. Manufacturing jobs laid the foundation for a growing middle class, while technology transfer accelerated modernization. These countries were happy to accept dollar dominance as the price of admission to this development model.
For financial centers such as Switzerland, Singapore, and the United Kingdom, the dollar system created lucrative opportunities without the full burden of reserve currency status. They could participate in global dollar markets, provide financial services for dollar flows, and capture enormous value without suffering the manufacturing recession faced by major reserve currency issuers.
Meanwhile, for the United States, the costs were partially masked by the benefits to consumers. Americans enjoyed low prices on imported goods, easy credit, and lower interest rates than they would otherwise have. The financial sector centered in New York captured enormous value by managing global dollar flows. These obvious benefits have historically outweighed the less obvious but profound cost of industrial hollowing out.
The Inevitable Transition
History teaches us that no reserve currency lasts forever. From the Portuguese real to the Dutch guilder to the pound, every global currency eventually gave way to the erosion of the economic foundations that supported it. The dollar’s current plight suggests that this historical pattern continues.
What’s unique about our current moment is that no single country seems eager to take up the mantle. China, the most frequently mentioned potential successor, has shown notable hesitation to fully internationalize its currency. Europe’s euro project remains incomplete without a fiscal union. Japan and the United Kingdom lack the necessary economic scale.
This collective hesitation has created an unprecedented situation: a major reserve currency shows signs of exiting its role, but no obvious replacement is ready to go.
Trump’s aggressive tariff policy could accelerate this transition. By prioritizing domestic industry over international financial arrangements, the administration is effectively signaling that the United States will no longer accept the structural trade deficits required to issue the reserve currency. Yet without these deficits, the world could face a shortage of dollars, which could severely constrain global trade and finance.
Finding a New Balance
If the current reserve currency arrangement has become unsustainable, then what comes next? More importantly, how messy will the transition be?
We should acknowledge that transitions from one global monetary order to another have historically tended to be messy, often accompanied by financial crises, political turmoil, and sometimes even war. The shift from sterling to the dollar was not planned or orderly—it emerged in the chaos of two world wars and the Great Depression. We should expect any future transition to be no less turbulent, unless we consciously design it to achieve stability.
The most commonly discussed alternative is a multipolar monetary 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 run excessive deficits.
However, a multipolar system would bring its own challenges. Liquidity fragmentation would increase transaction costs and complicate crisis response. Coordination problems among competing monetary authorities would intensify during periods of financial stress. Most importantly, this approach simply shifts the Triffin dilemma onto multiple shoulders rather than resolving the fundamental contradiction at its core.
Principles of an Ideal Alternative
Rather than focusing on specific implementation plans, let us consider the principles that would guide an ideal reserve system and its transformation—one that would resolve the core paradox: the costs of reserve currency status are unbearable for any country.
1. Collective Governance Rather Than Unilateral Control
The fundamental problem with national currencies as reserve assets is the inevitable conflict between domestic needs and international responsibilities. An ideal system would separate these functions while allowing countries to remain stakeholders in the governance of the system.
This does not mean that states will become powerless—quite the opposite. They will gain more meaningful collective influence in a system that directly serves the common interest, rather than being subject to the domestic political pressures of a single state. Neutrality does not mean abandoning state participation; it means changing the way it is engaged.
2. Principled Supply Management
The current system actually contains a key feature worth preserving: the ability to expand the stock of money and export it to meet global demand. This ability to expand is essential for the functioning of the global economy. The problem is not the expansion itself, but who bears the costs of the expansion and how it is governed.
The ideal system would preserve this ability to expand while adding something that the current system lacks: symmetrical contraction when appropriate. This balanced approach would preserve the strengths of today's system while addressing its structural weaknesses.
This is not about inventing entirely new mechanisms, but about implementing principles that have been understood for decades but have not been implemented due to political constraints.
3. Absorbing transition rather than replacing
Perhaps the most important principle is that any viable alternative must absorb rather than attack the current system. The approximately $36 trillion in U.S. Treasuries held by entities cannot simply be dumped without causing catastrophic damage to the global economy.
The ideal system would create sustained demand for these assets during the transition, allowing for gradual evolution rather than disruptive revolution. This is not about undermining the interests of any country, but about ensuring continuity as the system evolves.
The current issuer of the reserve currency (the United States) would actually benefit from this approach—gaining the ability to rebalance its economy toward production without triggering a debt market collapse that harms everyone.
4. Design for crisis resilience
Financial crises are inevitable. What matters is how the system responds to them. The current arrangement relies heavily on discretionary intervention by central banks, particularly the Federal Reserve, with political considerations often influencing the timing and size of interventions.
An ideal alternative would incorporate predetermined, transparent mechanisms to stabilize markets during periods of stress—providing emergency liquidity, preventing panic chain reactions, and ensuring that key markets function properly even when individual self-interest could drive disruptive behavior.
Importantly, this approach does not eliminate discretionary crisis response at the national level. Sovereign currencies would retain their full crisis management toolkit—central banks could still conduct emergency operations, implement unconventional monetary policy, or respond to domestic financial stress as needed. The difference is that the international reserve layer would operate as a more predictable, rules-based mechanism, reducing reliance on single-country decisions to maintain global stability. This creates a complementary two-tier system: predictable international coordination coexists with flexible national responses, each doing its part.
5. Managed Appreciation Trajectory
It is important to note that a stable but controlled appreciation of reserve assets provides certain benefits to the system as a whole. It will create natural incentives for central banks to gradually increase their holdings while still allowing export-driven economies to function normally. Since these exporting economies already manage their currencies relative to the dollar, they can continue to do so with new reserve assets.
Transition Path
The most dangerous period in monetary evolution is the transition phase. Here, designing for stability is critical. The transition may go through several different stages:
Initial Adoption: Starting with complementary coexistence rather than replacement, the new system will establish credibility while minimizing disruption.
Reserve Diversification: Institutions, especially central banks, will gradually incorporate new assets into their reserves, thereby reducing dollar concentration without causing market panic.
Evolution of Settlement Functions: As liquidity and adoption increase, the system can increasingly serve the settlement function of international trade.
Maturation Equilibrium: Eventually a new equilibrium will emerge in which national currencies retain their domestic functions while international functions shift to a more neutral system.
In this process, the dollar will remain important—just gradually shedding the unbearable burden of serving both domestic and international needs. This represents an evolution, not a revolution.
Transition Challenges
No matter how well-designed the theoretical alternatives, transitioning from the current dollar-centric system presents enormous challenges. The dollar is deeply entrenched in global trade, financial markets, and central bank reserves. Abrupt changes could trigger currency crises, debt defaults, and market failures, with devastating human consequences.
A responsible transition requires building bridges between systems, not destroying them. Revolutionary approaches that advocate the collapse of the dollar could create the very economic disaster that the monetary system is supposed to avoid. However flawed the current system is, billions of people rely on its continued functioning even as alternatives develop.
The most viable path forward is gradual evolution, not sudden revolution. The new system must prove its superiority through practicality, not ideology, and gain adoption through positive incentives, not coercive disruption.
Prosperity considerations
The ultimate measure of any monetary system is not its ideological purity, 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 might create more balanced prosperity by:
allowing the United States to rebalance production without triggering a currency crisis
providing exporters with a more predictable monetary environment and avoiding political complications
protecting emerging markets from collateral damage from policies designed for other economies
reducing geopolitical tensions from the weaponization of finance
The prosperity problem ultimately lies in balancing stability, adaptability, and fairness—creating a system that provides enough predictability for long-term planning while responding to changing circumstances and distributing benefits more equitably than the current system.
Conclusion: A Burden No Country Can Bear Alone
The truth about reserve currency status contains important nuances. It’s not true that no one wants it—parts of the financial sector undoubtedly benefit from it and therefore support it. Rather, the benefits are concentrated, while the costs are spread across the broader economy. This inherent structural imbalance makes it unsustainable in the long term, regardless of which country bears the burden.
Trump’s policies suggest that the United States may no longer be willing to accept these diffuse costs to maintain this global role. Yet the system survives because, despite its flaws, everyone depends on someone to perform these functions.
The irony of history is that, after other countries have been accused for decades of “manipulating” their currencies to escape the dollar’s role, the United States itself may be the country that finally sheds the burden of reserve currency status. This presents both dangers and opportunities—both the danger of a disorderly transition and the opportunity to design a fundamentally better system.
The challenge we face is not only technical but also philosophical - to redesign the foundations of global finance to serve human prosperity rather than national interests. If we succeed, we may finally resolve the paradox that no single country can sustainably provide the essential functions of global currency.
Catherine
Weatherly
Kikyo
Anais
Joy
Alex
Miyuki