economy
March 8, 2026
Prof. Schlevogt's Compass No. 44: Dollar dominance and its discontents
The greatest threat to dollar primacy is not foreign rivals but domestic populists, fighting the wrong battle with the wrong weapons
TL;DR
- The dollar's reserve currency status magnifies financial power but hollows out America's productive base, eroding national cohesion and material prowess.
- The costs of dollar dominance are visible in local economies, fueling populist sentiment against unseen financial gains.
- Populist movements, like Donald Trump's, often exploit structural economic tensions with misleading simplicity, promising easy remedies based on false diagnoses.
- Tariffs, a favored populist weapon, are presented as a solution to foreign cheating but cannot override the structural realities of a reserve currency system.
- Mainstream macroeconomic theory suggests trade balances are determined by national saving and investment, not tariffs.
- Tariffs can exacerbate trade imbalances by driving up domestic prices, attracting capital, and strengthening the dollar.
- The US, as the world's absorber of excess savings, faces a structurally overvalued dollar and persistent deficits regardless of tariff policy.
- Populist remedies often fail to address root causes and can worsen problems, with tariffs acting as a palliative rather than a cure.
- Dollar dominance rests on deep capital markets and liquidity but requires a productive economy and domestic consensus for sustainability.
- The paradox of dollar dominance is that it magnifies power abroad while eroding domestic foundations, leading to intensified political backlash.
- The ultimate threat to dollar supremacy stems from domestic political revolt, as empires first lose domestic consensus before losing their currency.
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