Gambling with the dollar’s future

In the 1960s, Valéry Giscard d’Estaing, then France’s finance minister, famously described this consequence of America’s monopoly on the world’s reserve currency as an “exorbitant privilege.” Yet over time, this privilege—propped up by sustained demand for Treasury securities—has bred generations of US politicians and policymakers who show no regard for the risks posed by growing US current-account and fiscal deficits.

Worse, the US Federal Reserve fueled this cycle by keeping its policy rate “low for long” after the 2008 global financial crisis. For too many, “long” was interpreted as “forever.” They simply took it for granted that US growth would be consistently higher than the real interest rate on government debt, which itself would remain exceptionally low by historical standards. After all, despite the ballooning debt stock, the Congressional Budget Office (CBO) determined that the government’s net interest outlays as a share of GDP were lower in 2021 than two decades earlier.

But will the rest of the world continue to enable US politicians’ addiction to the exorbitant privilege? Foreign holdings of US Treasury debt accounted for around 13% of the outstanding stock in the early 2000s, and that share climbed to about 37% by early 2013, owing to China’s spectacular build-up of foreign-exchange reserves during its era of double-digit growth. But that was the peak, and the share has been declining ever since, to around 22% at the end of 2024.

The US dollar was appreciating throughout most of that period, so the reversal of the trend cannot be explained by valuation effects alone.

Rather, the growth of US fiscal deficits and the surge in new debt issuance significantly outpaced foreigners’ appetite for US Treasury securities (and the growth in foreign purchases has been anything but steady in recent years).

During the COVID-19 pandemic, the slack in foreign purchases of US Treasuries was offset by the Fed’s aggressive quantitative-easing program, which delivered a marked reduction in interest rates across the maturity spectrum, as intended. As the pandemic waned, however, inflation spiked to a 40-year high, prompting the Fed and central banks around the world to hike interest rates sharply and in rapid succession. This policy U-turn marked the end of the low-for-long interest-rate era.

While debt-service costs had been on the rise for emerging markets for several years by early 2022 (reflecting both higher debt levels and rising risk premia), the reality had been very different for the US and other advanced economies. But not any longer. According to the CBO, federal net interest outlays in 2024, at 3.1% of GDP, were more than double their level in 2021.

US President Donald Trump’s announcement of punitive tariffs on April 2, 2025 (“Liberation Day”), and the subsequent policy roller coaster he created, has further frayed global linkages that had started to unravel with Brexit and the intensifying US-China rift.

Given the uncertainties around future trade relations with the US, many countries are hedging their bets and have redoubled their efforts to diversify their asset holdings away from the dollar.

Moreover, private investors, while still lured by the buoyancy of US equities and technology investments, have also signaled growing concerns about the future of the US dollar by increasingly hedging their exposures. And since hedging is costly, some may be deterred from holding dollar assets.

Likewise, despite China’s large footprint in the global economy, the renminbi lacks international convertibility, which is essential for a global liquid reserve currency. China’s currency did seem poised for internationalization up to 2015. But its financial liberalization process came to a sudden stop as the government doubled down on capital controls to stem reserve losses and capital outflows.

While there is no immediate candidate to supplant the US dollar, higher US inflation remains a threat, and global trade with the US is becoming increasingly fragmented. In this environment, US policymakers cannot be complacent about maintaining America’s exorbitant privilege.

The Trump administration seems to be betting that growth will solve the country’s troubling debt trajectory. But the erosion of Treasury securities’ safe-haven status makes this calculation even more dubious. There is scant historical evidence to support the proposition to begin with, and current trends are undercutting it further.

Even the strategy of kicking the can down the road eventually runs out of road, as US policymakers may find out.

Carmen M. Reinhart, a former senior vice president and chief economist of the World Bank, is professor of the international financial system at Harvard Kennedy School.