No single country can sustainably provide the basic global currency functions.
Written by: Zeus
Compiled by: Block unicorn
Introduction
For decades, economists and policymakers have described the global dominance of the dollar as America's "exorbitant privilege"—a jewel in the crown of American power that grants 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 a part of the U.S. economy—particularly financial institutions and capital markets—benefits immensely from the reserve currency status, these gains are highly concentrated, while the costs are widely distributed across the country. This structural imbalance makes the role of a reserve currency inherently 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—its advantages come with severe structural costs.
The Hidden Burden of Reserve Status
The fundamental issue of reserve currency status is encapsulated 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: to provide the world with enough dollars for international trade and reserves, the U.S. must continuously run trade deficits, essentially exchanging dollars for goods.
While these deficits are crucial for global monetary stability, they have gradually eroded the U.S. domestic manufacturing base, job market, and the economic foundation that initially made the dollar attractive. The issuing country of a reserve currency finds itself caught in a contradiction between domestic and international priorities, a contradiction that cannot be permanently resolved but can only be managed at an ever-increasing cost.
The most obvious consequence is the sharp hollowing out of American manufacturing. Since the dollar became the undisputed reserve currency after the collapse of the Bretton Woods system in 1971, the U.S. has undergone profound industrial transformation. The share of manufacturing in GDP has fallen from about 25% in the 1960s to less than 12% today. Entire regions once dedicated to production have been hollowed out, creating the infamous "Rust Belt," accompanied by profound social upheaval.
What is less 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, that country must, by necessity, consume more than it produces and import more than it exports. The result is a slow deindustrialization under the guise of consumption prosperity.
Considerations for Exporting Countries
It is often assumed that export powerhouses like Germany, Japan, and China would eagerly seize the opportunity to take over the 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 would want their currencies to occupy the privileged position currently held by the dollar?
However, these countries have consistently shown a strange hesitation, unwilling 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 understanding of the associated costs. For export-oriented economies, reserve currency status would be devastating to their economies. Increased demand for their currency would drive up its value, making exports more expensive and imports cheaper. The resulting trade deficits would undermine the export-driven model that propels their economic growth.
Japan's experience in the 1980s serves as a cautionary tale. As the yen began to internationalize and appreciate, Japanese policymakers grew concerned about its impact on their export sector. The Plaza Accord of 1985 led to a significant appreciation of the yen, ultimately ending Japan's economic miracle and ushering in its "lost three decades." Naturally, China, closely observing this history, is reluctant to repeat the same mistakes.
For these countries, the current arrangement offers a better solution: they can maintain an undervalued currency to promote exports while reinvesting dollar surpluses in U.S. Treasury bonds, effectively lending money to Americans to purchase their products. This dollar recycling allows them to maintain their export advantages while funding American 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 demand and international responsibilities. They enjoy the benefits of the dollar system without having to bear its costs.
America's Growing Hesitation
Perhaps the most compelling evidence that reserve currency status is not as richly rewarding as portrayed comes from the U.S. itself. An increasing number of American policymakers, from various political factions, are questioning whether the "exorbitant privilege" is worth its domestic costs.
The Trump administration has made this shift explicit. Trump's tariff policies were reintroduced with greater force during his second term, directly challenging the mechanisms that sustain dollar hegemony. By imposing a broad 10% tariff on all imported goods (with higher rates for specific countries), the Trump administration was effectively signaling that the U.S. is no longer willing to sacrifice its industrial base for the sake of reserve currency status.
When Trump declared that "tariffs are the most beautiful word in the dictionary," he marked a profound shift in American priorities. The goal was clear: to reduce trade deficits, even at the cost of undermining the mechanisms that maintain the dollar's dominance.
This is not merely an aberration of Trump. Trade skepticism has increasingly become a bipartisan consensus, with prominent figures from both political sides questioning the orthodox view of free trade and its impact on American workers. For decades, maintaining dollar hegemony could justify the deindustrialization of the U.S., but this consensus is now teetering in the minds of both parties.
Asymmetric Interests
To understand why the current system persists despite no one wanting to occupy the core position, we must recognize the asymmetric interests it creates for different participants.
For emerging economies, the dollar system provides a mature path for development. By maintaining undervalued currencies and focusing on exports, countries from South Korea to Vietnam have propelled their industrial development. Manufacturing jobs have laid the foundation for a growing middle class, while technology transfer has accelerated modernization. These countries are willing to accept dollar dominance as the entry cost for 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, providing financial services for dollar liquidity, and capture significant value without suffering the manufacturing decline faced by major reserve currency issuers.
Meanwhile, 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 would otherwise be the case. The New York-centered financial sector captures immense value by managing global dollar flows. These apparent benefits have historically outweighed the less visible but far-reaching costs of industrial hollowing out.
Inevitable Transition
History tells us that no reserve currency can last forever. From the Portuguese real to the Dutch guilder to the pound sterling, every global currency has ultimately yielded to the erosion of the economic foundations that supported it. The current predicament of the dollar indicates that this historical pattern continues.
What is unique about our current moment is that no single country seems eager to take on this burden. The most frequently mentioned potential successor, China, has shown significant hesitation regarding the full internationalization of the renminbi. The euro project in Europe remains incomplete without a fiscal union. Japan and the UK lack the necessary economic scale.
This collective hesitation creates an unprecedented situation: the major reserve currency shows signs of exiting its role, but no obvious alternative is ready to step in.
Trump's radical tariff policies may 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.
Searching for 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 has historically often been chaotic, frequently accompanied by financial crises, political turmoil, and sometimes even war. 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, where 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 brings its own challenges. The dispersion of liquidity would increase transaction costs and complicate crisis response. Coordination issues among competing monetary authorities would intensify during financial stress. Most importantly, this approach merely shifts the Triffin dilemma onto multiple shoulders rather than resolving its core fundamental contradictions.
Principles for an Ideal Alternative
Rather than focusing on specific implementation schemes, let us consider the principles that an ideal reserve system and its transition should follow—one that can address the core paradox: the costs of reserve currency status are burdens that 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 countries to continue as stakeholders in the governance of the system.
This does not mean that countries would become powerless—quite the opposite. They would gain more meaningful collective influence in a system that directly serves common 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 way participation occurs.
2. Principled Supply Management
The current system actually contains a key feature worth preserving: the ability to expand the money supply 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.
An ideal system would retain this capacity for expansion while adding what the current system lacks: symmetrical contraction at appropriate times. This balanced approach would preserve the advantages of today's system while addressing its structural weaknesses.
This does not require inventing entirely new mechanisms but rather 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 in U.S. Treasury bonds held by entities cannot simply be discarded, as doing so would cause catastrophic damage to the global economy.
An ideal system would create sustained demand for these assets during the transition, allowing for gradual evolution rather than destructive revolution. This is not about harming the interests of any country but ensuring continuity in the evolution of the system.
The current reserve currency issuer (the U.S.) would actually benefit from this approach—gaining the ability to rebalance its economy towards production without triggering a debt market collapse that harms everyone.
4. Crisis Resilience Design
Financial crises are inevitable. What matters is how the system responds to these crises. The current arrangement largely relies on the discretionary intervention of central banks (particularly the Federal Reserve), with political considerations often influencing the timing and scale of interventions.
An ideal alternative would incorporate predetermined, transparent mechanisms to stabilize markets during periods of stress—providing emergency liquidity, preventing panic cascades, and ensuring that key markets operate normally even when individual self-interests may drive destructive behavior.
Importantly, this approach does not eliminate the discretionary crisis response at the national level. Sovereign currencies would retain their full crisis management toolkit—central banks would still be able to conduct emergency operations, implement unconventional monetary policies, or respond to domestic financial pressures as needed. The difference lies in the fact that the international reserve layer would operate under a more predictable, rules-based mechanism, reducing reliance on unilateral decisions by any single country 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 yet controllable appreciation of reserve assets brings certain benefits to the entire system. It would create natural incentives for central banks to gradually increase their holdings while still allowing export-driven economies to operate normally. Since these export economies have already managed their currencies relative to the dollar, they can continue to adopt this approach with the new reserve assets.
The Path of Transition
The most dangerous period in monetary evolution is the transition phase. Here, design for stability is crucial. The transition 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: 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 rates increase, the system can increasingly serve the settlement function for 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.
Throughout this process, the dollar will maintain its importance—only gradually shedding the unbearable burden of simultaneously serving domestic and international demands. This represents evolution, not revolution.
Transition Challenges
Regardless of how well-designed a theoretical alternative may be, transitioning from the current dollar-centric 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.
A responsible transition requires building bridges between systems rather than destroying them. Revolutionary approaches that advocate for the collapse of the dollar could inadvertently cause the economic disasters that the monetary system is meant to avoid. Despite the flaws of the current regime, 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 disruption.
Prosperity Considerations
The ultimate measure of any monetary system is not the purity of its ideology but its actual impact on human prosperity. The asymmetrical benefits and burdens created by the current reserve currency arrangement are increasingly unsustainable. A well-designed alternative could create a more balanced prosperity by:
Allowing the U.S. to achieve production rebalancing without triggering a currency crisis
Providing a more predictable monetary environment for exporting countries, avoiding political complications
Protecting emerging markets from collateral damage caused by policies designed for other economies
Reducing geopolitical tensions arising from the weaponization of finance
The prosperity issue ultimately lies in balancing stability, adaptability, and fairness—creating a system that provides sufficient predictability for long-term planning while being responsive to changing environments and distributing benefits more equitably than the current regime.
Conclusion: A Burden No Single Country Can Bear Alone
The truth about reserve currency status contains important nuances. It is not that no one wants it—certain parts of the financial sector undoubtedly benefit from it and thus support it. More precisely, the benefits are concentrated, while the costs are distributed 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 indicate that the U.S. may no longer be willing to accept these dispersed costs to maintain this global role. However, the system persists because, despite its flaws, everyone relies on someone to fulfill these functions.
The irony of history is that after decades of other countries being accused of "manipulating" their currencies to escape the dollar's role, the U.S. itself may be the country that ultimately sheds the burden of reserve currency status. This brings both danger and opportunity—both the risk of a disorderly transition and the chance to design a fundamentally better system.
The challenge we face is not only technical but also philosophical—redesigning the foundations of global finance to serve human prosperity rather than national interests. If we succeed, we may finally resolve this paradox: no single country can sustainably provide the basic global currency functions.
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