Check Your Privilege

If you ask me to name the one thing that makes the United States the most powerful and influential country in human history... 

I don't answer its military. Even though the U.S. defense budget is staggering.

I don't answer its rule of law. Even though the U.S. ranks very high in the world. 

I don't answer its living standards. Even though the U.S. ranks in the top 5 in economic freedom.

I don't answer its cultural inclination to dominate and conquer faraway lands, nor the facility (and most importantly, the willingness) of its citizens to move within its borders in search for a better future. Laudable as that may be.  

Even if the % of movers has decreased since the 90's, close to 17MM people moved within the US in 2017 alone. That's almost  the equivalent of the Netherlands, or Ecuador, or Senegal moving houses in 12 months 🤯. 

I would not even answer its marvelous capacity to take in immigrants from all other the world for more than a century now. 

No.

My answer to this question is: The Dollar (or the Dollar Standard, to be more precise).

The United States owes its world supremacy to the fact that the entire world needs those green pieces of paper issued by the Federal Reserve to be able to trade with other countries, and stash them as Central Bank Reserves. We have one particular individual to thank for this, by the way: Harry Dexter White. We don't really celebrate him as the craftsman of the world order that made the U.S. the hegemon because somehow he got embroiled in espionage scandals that marred his legacy... but I digress. The fact is, he's the one who outfoxed legendary John Maynard Keynes (who wanted an international currency managed by a global central bank called the "bancor") at Bretton Woods, where the current international financial order* was birthed. 

Why is this world order important, you ask? Well, when world is forced to buy your currency because without it they cannot import stuff from abroad, this gives you innumerable benefits, like: 

• Artificially low interest rates: When the world is forced to buy your currency, that mandate means they also need to buy your sovereign debt too (to earn some interest on their idle balances). This artificially-mandated demand for your sovereign paper means U.S. treasury rates are perennially low. Lower rates mean savings for dollar borrowers, too. How much savings? Roughly $100 billion annually according to Kenneth Rogoff. Being the recipient of World Seigniorage is good, too:

• U.S. Treasury interest rate is 0.6% lower (on average) than comparable safe bonds because the dollar is the world reserve currency. This means savings of 0.7% of GDP (annually) on a stock of debt of 120% of GDP (current Debt/GDP level of the U.S.)
• 1 Trillion dollars is also held by foreigners, providing the equivalent of an additional 0.16% of GDP in Seigniorage revenue at a 4% interest rate, just because the dollar is the world reserve currency 
• For those keeping score at home, this adds up to an additional 0.9% GDP in savings, all thanks to Mr. Dexter's political maneuvering at Bretton Woods.

• You can run trade deficits unlike any other country without much consequence (for a while): It might seem bad to always run trade deficits (as the US has for years), but if you're the provider of the world currency, you might as well get stuff (imports) in exchange for it, no? Besides, it's not like there's going to be a run on your currency. Remember, the world is forced to buy it anyway! 
• The deluge of dollars bound to inflow back to the US: What good is holding a dollar in a country with its own (different) currency? Sure, some countries dollarize (at the expense of relinquishing monetary policy), but generally, those dollars are naturally bound to return to the place where they can be accepted and used (the U.S.). Which means always running a massive capital surplus with those inbound dollars. This, by the way, is a panacea for the U.S. financial industry (and economic growth in general) and a major reason the U.S. is one of the most financialized countries in the world: 

• Your currency is stable: It might be a tautology, but a currency that the world is forced to buy is --by definition-- stable. And a stable currency means a stable economy.
• You get to build the financial world around you: If everyone is forced to buy your currency, everyone is also forced to use the networks you build to manage it. The financial world is forced to use the SWIFT payment system, for example, which automatically gives you a weapon to wield against those who don't play ball (Hello Iran!👋🏼 ). 

All this means ultimate Geopolitical Power.

It's not for nothing that this benefit is called "The Exorbitant Privilege"

This is why I answer "the Dollar" (Standard) when asked what makes this country special. Sure, you might say it's its location (between 2 oceans, and sandwiched between 2 relatively weak and friendly neighbors), but the same could be said of Australia (it's its own continent!) and the Aussie represents just 2.5% of the world reserves, compared to 60% of the dollar. 

If the U.S. has gotten it so good for so long under the Dollar Standard and its Exorbitant Privilege, why then would the current administration actively retreat from the status quo as the world leader (welcoming a "multipolar world"), abandoning allies, imposing tariffs on everyone, closing itself off from the world, hitting everyone with Tariffs to reduce the trade deficit, and openly advocating for Crypto (deregulating it, and allowing banks to hold them) to the detriment of the Dollar?

This graph right here might begin to delineate the answer: 

It turns out, delivering dollars to the world in exchange for stuff (aka imports, and therefore trade deficits) as mandated by the Dollar Standard means this stuff needs to be produced in the country receiving said dollars. It's the Faustian bargain you get when you have the printing monopoly of the world's reserve currency. It also means your currency is perennially (if artificially) strong (hence the perpetual trade deficits). Of all those countries that get dollars, China has been able to master their ability to manufacture and export stuff to a degree that's upending entire global industries (just look at what's happening with EV's), hoarding stratospheric amounts of dollars (but also, treasuries) in the process. Japan, too, BTW. If you want to identify which countries the U.S. runs the biggest trade deficits against, just look at the biggest foreign holders of U.S. Debt. 

This is, of course, to the detriment of blue collar workers in the U.S. who used to produce that stuff --the same blue collar worker that forms President Trump's electoral base. 

Of course, establishing causality is tricky business. Just because the red line in the graph above tilts down hard the moment China joins the WTO, doesn't mean they're the sole reason Donald Trump is president. The same could be said of financialization --if you conceive Wall Street as a money purse holder who doles out loans to businesses in exchange of jobs cuts and efficiencies in the pursuit of profitability. 

But here's where things get interesting. You can also link financialization to the Dollar Standard. That deluge of dollars being recycled into the U.S. --that capital surplus-- is the perfect nutrient for the development of the financial industry and its sophistication, with all its bad consequences for blue collar workers.

  

Why do I say this? At its peak in the mid 20th century, right at the outset of the Dollar Standard (remember, Bretton Woods happened in 1944), manufacturing had 40% of all profits and employed 29% of the people. By 2022, finance has 40% of the profits and 5% of the jobs. Financialization, which started right after Bretton Woods and the Dollar Standard, has spawned a low-employment industry, and replaced a high-employment industry. 

If you lose your job (and your sense of self with it), and then are hit with an opioid epidemic that's killing many of your loved ones, you get angry. Add to it a sudden & uncontrolled influx of illegal immigrants at the beginning of the Biden administration (fixed somewhat later, but too late to fix perceptions), who you're told (super effectively) are stealing your jobs (nevermind it was automation and the China manufacturing juggernaut who did that), and you're not only angry. You want revenge. So you bring in a guy who promises you "retribution". There's even a study by Arteaga and Barone proving that the communities where Oxycontin was heavily marketed in the 90's as cancer pain medication by Purdue Pharma were 50% heavier users of fentanyl in the 2010's, and found that those same communities shifted 4.6% toward Republicans in the 2020 election just from this effect alone (even controlling for exposure to economic shocks).

Am I saying that the reason the U.S. is abdicating its role as Global hegemon unilaterally is that there's a significant swath of the U.S. population whom this world order didn't (and hasn't) helped, and in fact, that it has irrevocably hurt? Well, yes. But not only that. The other reason Trump (and those behind him, like JD Vance's political creator Peter Thiel) seems to be trying dismantle the world order from within might very well be to arrest the exponential growth of debt, which currently reaches 120% of GDP. 

Powell himself has said it: 

"The debt is growing faster than the economy, so it is unsustainable."

  

"Wait a minute... but didn't you say the U.S. could run deficits unlike any other country?" You might ask. Well yeah (kind of). Because the dollar is the world's reserve currency, it's estimated that the U.S. can incur in an additional 22% of GDP in debt. But I also said it could run deficits "for a while". You get to a point where interest payments are so high that your government spending gets eaten up by debt service and can't use it for productive things, at which point you have to address the issue. And, depending on who you ask (just don't ask Stephanie Kelton and the MMT guys, who don't believe in deficits), it seems we're getting to that point: U.S. interest payments have reached the highest levels of since the 90's, which clearly was a problem then. 

Not only that. The composition of the debt is such that 7 Trillion have to be refinanced just this year alone. 

Trying to fix a spending deficit problem, a debt problem, a trade deficit problem, along with trying to protect (avenge) those blue collar workers stung by the secondary effects of Dollar Standard, are the reasons the current government is willing (trying?) to abdicate its Exorbitant Privilege. That is what it means to quit being Europe's security blanket (demanding they pay for their own defense), announce 8% Defense budget Cuts (something absolutely unthinkable just months ago), and slapping tariffs on all kinds of countries. It means driving the dollar weaker so trade deficits disappear. Some in the administration (Stephen Miran, nominee to lead Trump's CEA) are even floating exotic ideas about restructuring U.S. debt, where those interested in still being protected by the U.S. security umbrella need to exchange their short term U.S. debt for century bonds without coupon (the "Mar-a-Lago Accords"). If you don't get the magnitude of the statement, I'll say it again: the nominated leader to the Council of Economic Advisors advocates for the restructuring of U.S. sovereign debt. 

Now, cutting spending is always hard. People used to the old regime will cling to it. Elon is attempting to do the same ruthless thing he did at Twitter, where he cut 80% of staff and was somewhat effective at keeping the platform functional after a rocky period (transforming X into a cesspool of unregulated hate speech, Russian propaganda and misinformation, but functional nonetheless). Attempting this at the federal Government is a total different ball game. Twitter endured shock therapy with some hiccups like freezing people users out of their accounts. Big whoop. How many airplane accidents and dead people have occurred since Trump's Federal Government's shock therapy at the FAA? As of last week, 87, 13 of which were fatal. Scary stuff indeed. Elon's minions say they've cut $55 billion (although their website shows only a fraction of that). The fiscal deficit is $1.8 Trillion. Those cuts are 0.2% of GDP. Which why the bond market is yawning. Bluster and bogus forecasts might bamboozle some star-struck VC's investors, but bond traders now better. And I won't even go into the high school-aged "DOGE kids" muscling their way into the IRS systems gaining access to your and my tax returns.

Is all of this worth it? Is burning all the bridges you spent decades building, destroying all international loyalties, diplomatic alliances, security pacts, exchanges of favors with allies, trade deals that secured and benefited U.S. industries (and their employees), all of which turned you into the number one consumer in the world, home of the most dynamic and fertile startup ecosystem of the planet, coveted destination of the most brilliant and ambitious talent of the world, with military bases in every corner of the planet... is all of this... justified?

And even more importantly: to replace it with... what? A new alliance with Russia? In a world where everyone will retaliate your measures and escalate economic conflict? A world where the dollar will no longer be seen as the the world currency, since the U.S. will retreat as the center of the financial world? A world where your allies will turn to China, who will welcome them with open arms in their sphere (as is already happening in Africa and LatAm, and very soon, probably Europe too)?

The U.S. built its military, its rule of law, its living standards, its internal mobility, its outstanding consumer economy on the back Dollar Standard. 

Abdicating this role would be a major, major, major, major mistake. 

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* Yes, I'm aware Bretton Woods established the Gold Standard, but it was also the precursor that seeded the Dollar as the center or world trade once the Dollar abandoned its Gold convertibility.