economy

February 1, 2026

Prof. Schlevogt’s Compass No. 39: The exorbitant privilege trap

The dollar’s reserve status yields leverage – at hidden cost. An economic reckoning reveals the trade-offs embedded in monetary dominance.

Prof. Schlevogt’s Compass No. 39: The exorbitant privilege trap

TL;DR

  • The dollar's reserve status is often seen as a cause for US actions, but this is a reductive oversimplification.
  • Reserve currency status offers advantages like cheaper borrowing and deeper financial markets.
  • However, it also leads to corrosive feedback effects including trade deficits and industrial decline.
  • The US cannot print unlimited money without consequence; inflation and debt still assert themselves.
  • Fiscal flexibility enabled by cheap money can lead to debt traps, diverting resources from productive investments.
  • Over time, reliance on foreign investors for sovereign debt can transmute sovereignty into dependency.
  • The 'exorbitant privilege' of reserve currency status carries significant long-term domestic burdens.

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