Prof. Schlevogt’s Compass No. 39: The exorbitant privilege trap – How dollar power ensnares America
rt.com
Friday, January 30, 2026
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The dollar’s reserve status yields leverage – at hidden cost. An economic reckoning reveals the trade-offs embedded in monetary dominance.
In some corners of the political imagination, the dollar has become a grand theory of everything – not...
The dollar’s reserve status yields leverage – at hidden cost. An economic reckoning reveals the trade-offs embedded in monetary dominance.
In some corners of the political imagination, the dollar has become a grand theory of everything – not a currency, but a convenient, catch-all, virtually cosmic culprit.
Every sanction, every covert operation, every warship dispatched toward some far-off horizon is traced back to a single, hidden animating force: the need to defend the world’s monetary throne.
From long-past wars of choice to the latest flashpoints – sweeping in events as dramatic, and geopolitically fraught and contested, as the 3 January 2026 US thunderclap in Venezuela – are folded into one totalizing teleology and demonology of Mammon, money incarnate.
Yet the reductive strain of credulous pundits who lean dogmatically on this currency-centered frame does more than misread history: The narratives of currency determinism manifestly distort the record, vastly overstating the dollar’s net contribution to American power, mistaking financial plumbing for geopolitical purpose. At the same time, the anti-mainstream commentariat crowds out the real, more complex and consequential drivers of US intervention.
That overweening posture of activist meddlesomeness has its own name in an older vocabulary; it is the modern expression of an imperial temperament that the Athenians of the classical age called polypragmosyne, restless involvement in (too) many (foreign) affairs.
Fathoming the true forces at work in their fine-grained texture and systemic complexity requires a methodical economic inquiry. A reckoning worthy of the subject must be capable of separating slogan from substance, and fact from fiction, being marked by rigor rather than recycled echo-chamber rhetoric.
By its very nature, reserve-currency status confers distinctive advantages on the US. Yet dynamic forces embedded at the core of the world’s financial architecture generate insidious, structurally corrosive, and self-reinforcing feedback effects. Left to compound, these pathologies systematically tilt the balance of payments, degrade the industrial base, and toxicize the political landscape.
Seen in this light, the current world-reserve regime comes into view as Janus-faced, bestowing power even as it corrodes its foundations, and hence offers no unequivocal economic warrant for hazardous and expensive military ventures and entanglements. This ambiguity is perhaps most clearly exposed by an unlikely but probative crown witness.
On 25 July 2025, US President Donald Trump, hardly a theorist of international political economy, laid bare the contradiction at the heart of dollar hegemony in characteristically reductive, rough-hewn terms: While professing his fondness for a strong dollar, he nonetheless conceded that “you can’t sell anything” when the currency is too strong, and that “you make a hell of a lot more money with a weaker dollar.”
The deeply embedded distortions and imbalances hard-wired into the load-bearing infrastructure of global finance call for radical, systemic reform rather than reflexive recrimination, reactionary retribution, or other roughshod remedies drawn from the populist-militarist repertoire. The analysis properly begins with the monetary mechanics.
Global financial infrastructure: Inside the planet’s pecuniary plumbing
Today, the US dollar, occasionally invoked in near-mythic terms as “green god”, occupies the position of the world’s leading reserve currency. It is worth pausing, at the outset, to consider what this illustrious designation precisely entails.
A reserve currency is the money that governments and central banks around the world hold in large quantities and rely on as their default international monetary instrument. It is the standard unit the global system turns to when it needs to save, price, lend, or pay across borders.
As to its specific functions, a reserve currency serves as a store of value (kept in national reserves), a medium of exchange (used to clear global trade and financial transactions), a unit of account (the currency in which many international prices are quoted), and a financial anchor (the backbone of banking, debt markets, and payment systems).
It is the dollar that stands as linchpin of today’s global financial system. In part because oil is largely traded in what are often termed petrodollars, many countries hold dollars and US Treasury securities, borrow in dollars, price goods in dollars, and rely on dollar-based systems to move money across borders.
The dollar’s systemic centrality is secured not by decree but, in substantial part, by the scale, liquidity, legal predictability, and the deep embeddedness of US financial markets in global commerce – qualities that configure the “land of opportunity” as the world’s liquidity utility. That platform, however, operates chiefly not on idle cash but on yield-bearing dollar assets.
Central banks do not simply “sit on” their dollars. Cash earns no return, erodes with inflation, and imposes custodial and liquidity-management costs, making it operationally inefficient at reserve scale.
For precisely these reasons, central banks purchase and hold, as part of a broader reserve portfolio, US Treasuries. These securities are effectively interest-bearing dollars, which are safe, instantly marketable (and thus convertible into cash at a moment’s notice), and fully integrated into the global financial system.
World reserve currency: Exorbitant privilege, hidden burden
The dollar’s reserve status is often characterized as an “exorbitant privilege.” Coined in the 1960s by Valéry Giscard d’Estaing, then France’s finance minister, the phrase captures the distinctive advantages the US derives from issuing the world’s dominant currency. They encompass cheaper borrowing sustained by steady global demand for US government debt, exceptionally deep and liquid financial markets, smoother trade settlement, and enhanced influence over the commanding heights of global finance.
It bears emphasis that global demand for dollars confers on the US the rare capacity to convert paper into purchasing power, as it were; it is an extraordinary license no other nation on earth enjoys at comparable scale.
By issuing the money the world stockpiles, America can both acquire real goods, services, and assets and fund its deficits with comparative ease, without relinquishing an equivalent volume of real output in return. This amounts to an extraordinary form of modern seigniorage (the gain from issuing money), here expressed as the power to draw productive resources from the world through the creation of money alone.
While issuing the world’s reserve currency endows a country with considerable practical advantages, it does not grant it magical powers; structural preeminence does not repeal the laws of economics. Hard, constraining material realities, such as inflationary pressures and the burdens of accumulating debt, continue to assert themselves.
At a deeper register, and more striking still, reserve-currency dominance also generates pernicious feedback effects in the form of chronic trade deficits, industrial hollowing-out, and the near-inevitable stirrings of populist backlash.
The illusion of monetary alchemy: No escape from economic gravity
Contrary to the myth-laden and loosely reasoned contentions advanced by a coterie of anti-mainstream critics – specious pronouncements at times redolent of well-worn conspiracy theories – the US possesses no Midas touch; it cannot simply print unlimited amounts of money without consequence. To construe reserve status as an “exorbitant” privilege, one that lies outside the normal orbit, is not to imply the absence of economic gravity.
Additional dollars do not, by some conjuring trick, cease to generate inflationary pressure merely because some of them are held abroad. Nor is the management of inflation somehow outsourced or nullified by reserve-currency status.
In the sphere of monetary policy, the Federal Reserve continues to set short-term interest rates autonomously; it can tighten financial conditions irrespective of foreign appetite for US debt. Whenever inflation rise above target, it can raise rates and render money scarcer even if foreign investors remain eager buyers of US bonds.
Economic fundamentals assert themselves here, as they do everywhere else. Strong global demand for the dollar may compress long-term yields, but it does not confer the US government the power to create unlimited money without inflation.
On the fiscal front, the reserve-currency prerogative renders spending and borrowing not only seductively easy and inexpensive, but also dangerously addictive. Cheap money dulls budgetary discipline, allowing deficits to compound quietly and seemingly painlessly. The burden is deferred to taxpayers not yet born: Today’s voters enjoy the spending; tomorrow’s citizens inherit the bill.
If inflation tests a currency’s short-term credibility, debt operates at a deeper stratum, over a longer time horizon. Inflation announces itself; debt insinuates itself. The former moves in cycles; the latter crystallizes into structure.
What begins as fiscal flexibility gradually hardens into a debt trap, as swelling public liabilities inexorably divert ever-greater portions of public resources toward servicing old obligations, at the expense of the productive investments that underwrite future growth.
Debt is not a passing pressure but an enduring and binding lattice of claims, incrementally accretive, relentlessly compounding, and politically consequential. Over time, mounting encumbrances progressively constrict policy freedom and deepen exposure to interest-rate shocks.
Economic management, then, is debased into an opportunistic, tactical, and transactional exercise in preserving confidence rather than the fiduciary, strategic, and transformative craft of cultivating and husbanding real, perdurable prosperity.
At that point, fiscal sustainability grows ever more contingent on the continued forbearance of global investors. The corollary is stark and momentous: When a nation’s fate, by degrees, comes to hinge on foreigners’ willingness to absorb sovereign liabilities, sovereignty itself is almost imperceptibly, yet ineluctably, transmuted into dependency.
Beyond these problems, reserve status unleashes corrosive interactions between global and domestic forces. In snowballing fashion, they compound the long-term costs of the exorbitant privilege of reserve-currency status, converting global demand for dollars into a domestic burden that grows heavier with time.
Once this logic takes hold, trade deficits are no longer episodes to be managed, but conditions to be lived with.
