The Dollar’s Reign: Why America Must End Its Costly Dominance

Hi, I'm Dong Shuang. Welcome to Digging into China, where we explore China in depth to review unique perspectives. Today, I'm shifting my focus from digging into America, specifically to examine the dominance of the U.S. dollar. Let me state my perspective up front. I believe the era of dollar dominance must end, and the sooner the better, for the benefits of the United States The phrase dollar dominance may sound formidable, even prestigious, but in truth, it's a deceptive term. The United States has paid a heavy price to sustain this dominance, and it has inflicted considerable harm on the nation. Therefore, it is imperative to bring this to a swift conclusion. Let's begin by defining what the dollar dominance entails. Dollar dominance refers to the process by which the U.S. dollar became the world's preeminent currency, underpinned by America's economic, political, and military might. The dollar has emerged as the global standard, with other nations developing a lopsided dependence on it over time. This has created a global political and economic order centered on the dollar's unrivaled position. The Bretton Woods system, established in 1944, marks the origin of dollar dominance. Even after Bretton Woods collapsed and the dollar was decoupled from gold, its dominance not only persisted but grew stronger. There is no shortage of books analyzing dollar dominance indeed. Their numbers are vast. Regrettably, most are authored by left-leaning economists who, rooted in the proletarian historical perspective, focus on denouncing dollar dominance while rarely exploring the costs it imposes on the United States. What has America sacrificed for this dominance? What are the tangible costs? Consider the global circulation of the dollar. For instance, oil-exporting countries sell crude oil to the U.S. And since energy transactions are settled in dollars, these nations accumulate a substantial dollar surplus. What do they do with these dollars? The surpluses are channeled to other countries through imports of goods and services, foreign aid, or investments, flowing to export-oriented allies to Europe and beyond. Over time, dollars accumulate in these regions as well. However, dollar cash does not inherently preserve or grow its value. To achieve appreciation, these countries reinvest their dollars in the U.S., where financial markets are dollar-based and promise high returns. This creates a global cycle for the dollar. In essence, dollars originate with the issuer, flow to oil-exporting nations, then to countries providing goods and services, and ultimately return to the U.S. through financial investments. This cycle forms the foundation of the global dollar system, known as dollar dominance. Many nations and individuals worldwide rely on the dollar, treating it as a reserve asset and storing wealth in the form of debt or equities. Yet, a significant issue arises. When these internationally circulating dollars return to the U.S. as financial investments, they bypass the real economy and flow directly into stock and bond markets, inflating financial bubbles. This is a key cause of dollar dominance for America—the expansion of financial bubbles while the real economy contracts and languishes. Statistics from 2024 reveals that the total market value of U.S. companies reached $51 trillion, with U.S. stocks comprising over half of the global stock market's value. By contrast, at the end of the 19th century, U.S. stocks accounted for just 15% of the global market. This stock market surge has not been evenly distributed over the past century. Since the 1980s, following significant interest rate reductions, America's financial markets entered a period of explosive growth. Concurrently, the real economy began to decline. Multinational corporations outsourced manufacturing to developing nations, resulting in widespread job losses for American manufacturing workers. The financial sector and the real economy are not merely economic indicators. They represent distinct political forces. Behind finance and industry lies separate political groups with closely aligned interests. Thus, the ascent of finance and the decline of industry signifies a parallel rise in the political influence of Wall Street's financial elite and speculators. Conversely, the influence of America's traditional working class and farmers has waned. This shift in the balance of power explains the growing internal divisions within the United States. To a significant degree, dollar dominance is the root cause. It has granted the dollar an unparalleled advantage while elevating the financial industry to a position of dominance, disrupting the equilibrium of politics and the economy. American manufacturing and the working class have suffered, and this damage, without exaggeration, threatens the very foundation of the nation. For America is not a nation built on finance. It was founded on labor, innovation, and creation. The bedrock of America, its core ethos, derives from Puritan ideals, which emphatically exclude the stock market speculation or the inflation of bubbles. Thus, the financial monopoly fostered by dollar dominance runs counter to America's original trajectory. Today, many observers focus on appearances rather than substance, believing dollar dominance brings only benefits to the U.S. with no drawbacks. In reality, while it may sound impressive, its harm to the nation is profound. The second major consequence of dollar dominance is the rapid accumulation of debt. The dollar dominance system has generated intense stimulation on both supply and demand. Most countries hold dollars as a reserve currency, driving a surge in dollar demand. To meet this demand, the supply of dollars must also increase significantly to maintain equilibrium. As we know, one primary form of dollar reserve is U.S. debt. Thus, global demand for dollars translates into demands for U.S. debt. To accommodate this, the U.S. issues vast amounts of debt, primarily to fund substantial public expenditures. The hollowing out of American industry has led to widespread unemployment, increasing spending on social welfare and unemployment benefits. Much of this debt is allocated to such purposes. Simultaneously, sustaining the global dollar dominance system requires ever-growing military and defense expenditures, which also depend on issuing debt to function. Consequently, U.S. debt continues to swell. As of January 2025, the national debt stood at approximately $36 trillion, with annual interest payments consuming roughly 20% of national revenue. The debt-to-GDP ratio has climbed from under 40% in 1980 to over 117% today, a level surpassing even World War II. A peacetime debt ratio exceeding that of wartime underscores the irrational and unhealthy state of America's economic system. It demands internal reform. The steep costs America incurs for dollar dominance are not merely an academic point. They mark the beginning of a new chapter in American politics. Some conservative and traditional Americans recognize this issue and are advocating for change. This is the impetus behind the so-called MAGA movement to make America great again. In response, the U.S. government is pursuing a series of economic reforms with a central focus on addressing dollar dominance, which has already harmed the nation. But what specific measures will these reforms entail, and will they succeed? These are critical questions, which we will explore next. Discussing the U.S. government's comprehensive economic reforms necessitates mentioning the so-called Mar-a-Lago Agreement, a detailed economic reform plan. Its core ideas stem from a November 2014 report by White House economic advisor Stephen Miller, titled, A User's Guide to Reconstructing the Global Trade System. This report is pivotal, as much of America's future economic policy is shaped by its recommendations. The report notes that the dollar's status as the global reserve currency means much of the demand for dollars and U.S. debt is not driven solely by profit motives. This demand is highly inflexible with respect to economic returns. Consequently, the dollar's exchange rate is far higher than necessary for balanced international trade. Meanwhile, U.S. imports vastly exceed exports, resulting in persistent current account deficits. The export sector and manufacturing have been severely impacted, and the entire economic structure is profoundly distorted. Based on this analysis, the report proposes a comprehensive economic reform plan, distilled into five key areas. First, U.S. manufacturing jobs have plummeted, and America's share of the global economy is steadily shrinking. As a consumer nation rather than a product export, the U.S. faces persistent trade deficits, with unchecked consumption depleting its resources. Additionally, America's global defense and security commitments require enormous expenditures, contributing to growing fiscal deficits. The U.S. government has long operated on borrowed funds, and the situation is dire. The Mar-a-Lago agreement identifies the over-evaluation of the dollar as the primary cause. Globally, countries treat the dollar as a reserve asset rather than a trade tool, preventing it from fully functioning as a currency. Instead, it has become a static asset. The total issuance of dollars is disproportionate to the actual demand for dollars in international trade. Thus, the agreement argues that the solution lies in devaluing the dollar a critical step. The report advocates raising tariffs to protect domestic manufacturing and generate revenue. However, the centerpiece is exchange rate policy. To reduce the dollar's exchange rate, the report suggests the following approaches. First, negotiate a multilateral exchange rate agreement with other nations, allowing the dollar to depreciate within a basket of currencies, akin to the historical Plaza Accord. Second, introduce so-called century bonds, whereby foreign governments sell their U.S. treasury holdings and remaining reserves are extended to much longer maturities. This would increase the dollar's market supply, devaluing it while alleviating America's debt burden through century bonds. Third, to incentivize countries holding large U.S. debt to sell. The U.S. could impose a treasury tax, raising the cost of holding U.S. debt. Fourth, the U.S. treasury could purchase other nations' currencies as reserves, reducing demand for dollar reserves and lowering the exchange rate. In summary, the objective is to lower the dollar's exchange rate. Implementing these measures is expected to significantly enhance the competitiveness of U.S. exports, revitalizing manufacturing, and advancing the goal of making America great again. This plan outlines precise steps, but can it be fully executed? Will it yield results? As the saying goes, ideals are lofty, but realities are sovereign. The plan's implementation will likely fall short, and here is why. Solutions like lateral currency agreements require cooperation among multiple nations. If other countries resist or oppose U.S. efforts to devalue the dollar, this approach will struggle to succeed. Similarly, measures like century bonds or compelling other nations to sell U.S. debt may encounter resistance, making it difficult to achieve the anticipated outcomes fully. Nevertheless, a decline in the dollar's exchange rate is likely to occur, though its extent will probably be limited. With the policy shifts under the current Trump administration, the U.S. economy has shown signs of a short-term downturn, influencing the dollar's trajectory. Over the long term, as dollar-based sanctions on nations like China are enforced, some countries will lose access to the dollar, forcibly reducing global demand. Meanwhile, the dollar's supply remains unchanged, creating an oversupply and insufficient demand. Per supply and demand principles, the dollar's value will decline. However, there are constraints on how far the dollar can fall. The Trump administration's ultimate aim is not to undermine the U.S. economy but to rejuvenate it, increasing America's global economic share. The U.S. GDP's global proportion is positively correlated to the dollar index. Thus, a stronger U.S. economy with a higher GDP share will elevate the dollar index. This creates a contradiction between making the U.S. economy great again and lowering the dollar's exchange rate. I anticipate the dollar's value will trace a modest U-shaped path over Trump's four-year term, declining initially then rising. Then there is the tariff policy. The U.S. currently has historically low tariffs, with tariff revenue constituting the smallest share of government income ever. Yet, raising tariffs does not guarantee substantial revenue. Higher tariff rates may deter countries from exporting to the U.S., shrinking the tax base and reducing actual revenue. Some suggest that 25% is the tariff ceiling. Beyond this, the tax base contracts and the revenue falls. Estimates indicate that, in the best scenario, higher tariffs could generate $400 billion annually. However, with U.S. debt exceeding $34 trillion, tariff revenue is a mere fraction of this burden. The U.S. will continue to grapple with the debt crisis. Another consideration is the so-called manufacturing revival. The U.S. trade deficit is staggering and entrenched, unlikely to change easily. Lowering the dollar's exchange rate creates opportunities for manufacturing, but the work ethic and labor willingness of America's younger generation remain troubling. This issue is tied to systemic issues in the U.S. education system and broader societal shifts. Since World War II, American universities have been dominated by progressive academic elites who promote left-leaning ideologies. These ideologies reject traditional labor values, emphasizing classist struggle and welfare dependency, and discourage the Puritan work ethic. Instead, they encourage reliance on state handouts. Decades of this ideological influence have produced generations of graduates shaped by progressive thought. While financial corruption may originate on Wall Street, intellectual and moral corrosion is undeniably rooted in America's leading universities. These institutions have become a societal blight, producing successive cohorts of entitled, idle individuals. This group constitutes a significant portion of the U.S. population, markedly reducing the average work ethic. Without a strong work ethic, discussions of a manufacturing revival are hollow. Historically, dollar dominance once served the U.S. well, but it now inflicts substantial harm. Terminating it is a decision driven by America's interests. Yet, regardless of the economic measures adopted, their execution will inevitably be imperfect. Moreover, an inescapable reality remains. No matter how America reforms or adjusts, it cannot return to its founding era. Over time, America's social and cultural landscape has transformed profoundly. The U.S. government's current efforts are straightforward—to make the economy marginally healthier. To draw an analogy, America is like a middle-aged man who has adopted unhealthy habits—drinking, smoking—that have compromised his well-being. The government, acting as a physician, offers guidance and treatment to restore a healthier lifestyle and eliminate those habits. That's the extent of it. Yet, regardless of the physician's diagnosis or treatment, America remains that middle-aged man. It cannot revert to its youth or childhood. America faces an inevitable future of aging—a historical progression that no will can alter. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps YouTube suggest my videos to others. I'll be back with more content soon. Until then, be well.