The long-standing ‘extraordinary privilege’ of the dollar is not going to end any time soon
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
The gold price against the US dollar is back above $5000 per oz after its recent short sharp contraction last week. The unprecedented rise in the gold price, particularly since the beginning of the Trump Mark 2 presidency one year ago, is the result of what is being called the ‘debasement trade’. This trade means that financial institutions, both public and private, are apparently trading out of US financial assets ie dollar cash and dollar debt, in particular. Why? It seems that financial investors and speculators, both foreign and American, fear that the dollar value of the assets that they own will fall. Why? For several reasons.
First, although Trump claims that inflation is falling fast, the evidence is to the opposite. US consumer price inflation is still officially ‘sticky’ and remains at a rate above the Federal Reserve’s official target rate of 2% a year. Moreover, as we have shown in previous posts, the official rate underestimates by as much as 2% pts the actual rate of inflation. Yet, Trump continues to demand that the Federal Reserve cut its policy interest rate and intends to replace the current Fed chair Jay Powell with somebody (Kevin Warsh) who will do his bidding. Higher inflation alongside lower interest rates is a recipe for investors to get out of dollar assets. The real (after inflation) rate of interest earned on dollar assets will fall further.
Another key indicator here is the differential between the interest rate received on the dollar compared to that received on other currencies, particularly the euro and the yen. Financial investors increasingly reckon that US interest rates will fall more than in other major economies over the next year or so. The Bank of England and the European Central Bank are in no hurry to cut their rates further – as they just announced at their meetings today – while the Bank of Japan is set to hike its rate further to support the yen. So the ‘forward’ (ie market forecast) differential interest rate for the dollar compared to other currencies has been dropping.
The Trump factor is also playing a role in the dollar’s recent demise and thus the debasement trade. His unpredictability, his bullying tactics with other countries, is increasingly forcing foreign holders of dollar assets ie companies investing into the US; financial institutions holding US stocks and bonds; and central banks with large holdings of US short-term assets (cash and treasury bills) to diversify into other currencies – or into gold. Indeed, gold, that ‘barbaric relic’ of the past monetary system, has now become the ‘safe haven’ asset to hold in the place of the dollar, and for that matter other major ‘fiat’ currencies like the euro, sterling or the yen.
In the past, whenever there was a financial crisis or a major political conflict, investors would pile into dollar assets, driving the dollar up – as happened during the 2008 financial crisis. That hasn’t happened under Trump; the dollar index has fallen 10% against other currencies in 2025. This time, the debasement trade has emerged.
The dollar, as the world’s major currency for central bank reserves and in transactions in international trade and finance, has been in gradual decline for decades. US imperialism has been the dominant power globally since 1945. That dominance has depended on four factors: industrial superiority; technological superiority; financial superiority and military prowess. The US was the major manufacturing economy in the 1950s and 1960s, but it gradually lost that position to rising European and then Japanese manufacturing. The litmus test was when the US trade surpluses with other nations turned into deficits, which has continued ever since. Then the US then began to leak dollars globally, not only through outward investment, but also through an excess of spending on imports over exports as domestic manufacturers lost ground to foreign competition.
Under the old fixed dollar-gold standard, dollar imbalances in trade and capital flows had to be settled by transfers of gold bullion. Up until 1953, as war reconstruction took place, the US actually gained gold of 12 million troy ounces, while Europe and Japan lost 35 million troy oz (in order to finance their recovery). But after that, the US started to leak gold to Europe and Japan. By end-1965, the latter surpassed the former for the first time in the post-war period in terms of gold volumes held in reserve. As a result, Europe and Japan began to pile up huge reserves that they could use to buy US assets. In the early 1970s, the US administration under Nixon came off the gold standard and let the dollar float. The global economy had begun to reverse against the US.
The US became reliant for the first time since the 1890s on external finance for the purposes of spending at home and abroad. Now US external accounts were driven less by goods and services and more by global demand for US financial assets and the liquidity they provided.
In the 21st century, particularly after the global slump of 2008, US industry also began to lose its superiority in high value-added technology based industries. Yes, it has the Magnificent Seven tech giants and it is driving forward the AI boom, but China and east Asia started to lead in many key technology-based sectors. Increasingly, their trade surpluses with the US are less with basic manufactured consumer goods and more with high-tech products.
However, until now the US has comfortably remained the dominant financial power in the world. Normally, if a country’s current account is permanently in deficit and it depends increasingly on foreign funds, its currency is vulnerable to sharp depreciation. This is the experience of just about every country in the world, from Argentina to Turkey to Zambia, and even the UK. But it is not the same for the US because the dollar is still the main currency internationally. Roughly 90% of global foreign exchange transactions involve a dollar leg; approximately 40% of global trade outside the US is invoiced and settled in dollars; and almost 60% of US dollar banknotes circulate internationally as a global store of value and medium of exchange. Around 50% of global foreign exchange reserves held by foreign central banks and monetary authorities remain denominated in dollars. And only the US treasury can ‘print’ dollars, gaining a profit from what is called ‘seignorage’ as a result. So, despite the relative economic decline of US imperialism industrially, the US dollar maintains its ‘extraordinary privilege’.
Even so, the underlying decline in US industrial power has weakened the dollar over decades – indeed this is what Trump sees as needing to be reversed. He wants to ‘Make America Great Again’ by restoring its industrial hegemony; and his weapons are tariff hikes and bombastic blustering threats.
Increasingly, he is resorting to the last major component of US imperialist hegemony, its military power. Gunboat diplomacy in Venezuela and Iran are just the latest episodes in that approach.
Trump’s plan to restore American industrial superiority with tariffs and bombs will not succeed. The relative decline of US industry will not be reversed. But what about that financial decline? We can see what is happening there if we look at the net international investment position (NIIP) of the US economy. This measures the amount of foreign assets held by US institutions against the amount of US assets held by foreign institutions, ie the net position of US foreign assets and liabilities. What are these assets and liabilities? They are the outstanding direct investments held; outstanding holdings of stocks (equities) and bonds; and holdings of cash and short-term securities.
This is how the US NIIP looks.
This net negative balance of assets and liabilities is equivalent to 79% of US GDP. As you can see, the negative NIIP has steadily widened. It means that foreigners increasingly hold more investments, shares, bonds and cash in the US economy than American institutions do of foreigners’ assets. As we have seen above, the reason for that is that the US has run trade and current account deficits every year since the 1970s and those deficits have been covered by foreigners keeping their trade surpluses with the US and other countries in US dollar assets; and also by investing in the US economy.
But that gap between liabilities and assets has been growing. Why? It is not because foreigners are investing in US industry so much. It’s true that net FDI investment by foreigners into the US has increased sharply since the mid-2010s, now reaching nearly $7trn in investment stock. But the major part of foreign holdings of dollar assets is in what are called portfolio investments: ie bonds and stocks (shares).
Foreigners now hold US government and corporate bonds of over $15trn and (net) near $12trn, or over 40% of the NIIP. Foreign institutions have usually held their US dollar assets in ‘safe’ US government bonds, while foreign central banks have held most of their reserves in dollar deposits or short-term treasury bills. But there has been a recent and significant change in the composition of the US NIIP.
Rather than use their surplus US dollars to buy US bonds, foreigners have increasingly bought US stocks. The US stock market boom, particularly since the end of the pandemic slump in 2020, encouraged massive foreign investment in the US stock market. US institutions used to purchase more foreign stocks than foreigners held US stocks. But by the end of 2025, foreigners held US equities worth $21trn, or net $6.5trn, more than their investments in US industry and more than their holdings in bonds – a massive switch. Now it seems that the US dollar’s value is increasingly dependent on foreigners holding US corporate stocks rather than US government debt. And that is risky for the dollar. If the AI bubble were to burst and the US stock market plunge, the value of foreign equity holdings would also dive and lead to a switch out of these dollar assets. So the dollar would take a further plunge.
Does this mean that dollar imperialism is over and the US dollar will now submerge globally to be replaced by alternative currencies, say from the BRICS economies, in a new multi-polar world? This is the theme of many radical economists and leftists. In my view, this is overdone. Let me explain.
For a start, there is no real alternatve to the US dollar in world markets. The euro cannot replace it and whatever the talk about a ‘BRICS currency’ (which does not exist); or the dollar’s replacement by the Chinese renminbi, that is wishful thinking based on the idea that the BRICS (let alone BRICS+) are really a united grouping resistant to US imperialism; or that China wants to end capital controls on its financial flows and so let the renminbi face the vagaries of world financial flows.
Second, the share of dollars in central bank reserves has fallen, but it’s still 50% of all CB reserves and no other currency or gold is anywhere near matching that share. Moreover, in foreign exchange markets, dollars are used in nearly 90% of all trades. Yes, there are increased direct trade exchanges between renminbi and rubles, and even Saudi riyals and renminbi, but the size of these exchanges is negligible compared to the bilateral trades between dollars and all other currencies.
Then there is the foreign exchange swap market. International financial institutions are continually ‘hedging’ against currency exchange movements to try and protect the value of their holdings. They swap currencies to do so – and this huge market ($100trn) is conducted also most solely in dollars (90%).
Institutions are not switching out of dollars into euros or yen or renminbi, but into gold. But gold cannot possibly replace the dollar in global financial flows. Even less so can cryptocurrencies. At current prices, the value of the world’s above-ground gold reserves is around $36 trillion, more than a dozen times the combined value of all cryptocurrencies, but only 30% of global GDP and less than 10% of global debt.
So the financial component of US imperialist hegemony will remain for some time ahead. Yes, the dollar might well fall further this year because of the stagflationary US economy; the bursting of the AI bubble and the likely further reduction in US interest rates relative to other national rates; along with Trump’s tantrums. But while the US dollar may have weakened in the last year, the dollar is still very strong historically. Federal Reserve data show that the real value of the dollar still stands nearly two standard deviations above its average since the start of the floating exchange rate era in 1973.
So the long-standing ‘extraordinary privilege’ of the dollar is not going to end any time soon, despite the recent ‘debasement’ trade.
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