America's Exorbitant Privilege

One of the chief duties of the citizen is simply to try to understand what’s actually going-on in the world. Even though we live in an era of unprecedented abundance when it comes to available information and opinions, this is no easy task. Why? As real time information has become almost free, profit-seeking companies have resorted to creating a technological overlay (think deliberately manipulative social media feeds) that has made understanding the truth just as difficult if not more than in the old days when information still cost something. At the same time, traditional media companies have been forced to resort to increasingly dubious and polarizing content strategies just to stay alive. With the rise of AI, this will almost certainly get worse.

One of my aims with the Nick Halaris Show is to create a space that can serve as an antidote to all the madness and confusion caused by our anti-democratic technological overlay. My hypothesis is that by exploring the truth, at a sufficient level of detail and complexity, with serious, thoughtful people we can arrive at a much better and deeper understanding of things. And now fifteen episodes in, I think we might just be on to something.

In recent weeks, I’ve spent a lot of time focused on trying to figure out what’s going-on in the global economy. While things are generally looking ok—inflation has been falling, the job market holding up and the stock market doing pretty well—this feels like a moment where things could turn South rather quickly. The war in Ukraine is on-going, China’s economy is sputtering, and it looks like the US is setting up to have its craziest Presidential election yet. This is no time for complacency, that’s for sure.

What we have learned so far from our guests is that there’s a real genuine concern out there about the sustainability of the global financial order. Fundamentally, the concern is about debt—there’s too much of it already and it’s growing way too fast. There’s a kind of inevitable logic to this pessimistic view. When you look at all the debts we’ve piled up, the unfunded promises we’ve made, the looming bills on the horizon from climate change, and our demographic problems, it’s hard not to think we’re all living in a massive house of cards. Just consider how things look here in the US:

With numbers like these, the US is looking more like a banana republic than a global hegemonic superpower. To be fair, the situation in most of the rest of the world is just as bad. Even China has become heavily indebted.

While there’s wide agreement that debt is a huge problem, not everyone believes collapse is imminent. For some, we are as close as ever. For others, there’s a lot more room for the madness to run. As I’ve been digesting all the great ideas and perspectives I’ve heard from our guests, it occurred to me that when it comes to understanding the likelihood of something like collapse there’s really just one big question out there.

Can the US Dollar retain its reserve currency status in the face of all our debts and growing political problems?

Why is this so important? Well, our reserve currency status gives us a huge strategic advantage in the global economy. So much so, that it’s been labeled by many as an “exorbitant privilege.” Without getting too far into the weeds on this—because everyone needs dollars to transact in the global economy, there’s basically this massive never-ending structural demand for US dollars. The exorbitant privilege here is that supported by this artificial demand, we can run both trade and fiscal deficits with no real consequences to our economy. The dollar stays relatively strong and our borrowing costs don’t spiral out of control. For “normal” countries without reserve currency status, what happens when they run big trade or fiscal deficits is their borrowing costs go up or the currency collapses. Essentially, we get to act as if we have no credit risk and that’s exactly what we’ve been doing.

What’s more, because the global financial order is largely predicated on the US dollar being the currency of choice for international trade and finance, the dollar has become an instrument of tremendous geopolitical influence. Countries that want to transact in global trade and finance need US dollars but must also play by our rules. In recent decades, the US has been very aggressive in weaponizing the dollar for geopolitical aims, effectively shutting off countries like Iran, North Korea, and now Russia from a huge portion of the global economy. Some argue that we’ve gone too far in this respect. Countries like China and Russia are busy trying to figure out how to de-risk themselves from reliance on American dollars. But so far, the US dollar has reigned supreme on the international scene:

Why? Sorry to all the Bitcoin fanatics and gold bugs out there, but right now there is just no real alternative. Even people like Simon Mikhailovich and Jim Rogers, who are very concerned about the viability of US hegemony, acknowledge that, for now at least, the $ is still the best currency in the world. Japan has even more debts than we do, the EURO is problematic because the EU structure lacks coherent political ties and the Chinese Renmimbi is basically a non-starter because A) they have a closed capital account and B) no one really trusts the CCP.

While I share the concern about the debt problem, I believe there’s still a good chance we can avoid the doomsday scenario. We’re almost certainly moving to a bi-polar global financial order with the US at the center of one and the Chinese at the center of another. But, even with all our problems, we are so much better positioned than the Chinese. It turns out that things like the rule of law and reliable property rights are rather important when it comes to decisions about money. The US still has a good brand in the world and with a little care and attention we could easily get back to the halcyon days of the post-WWII era.

I don’t have time or space today to get into all the details—I’ll save that for a future Profit+ article—but here's my roadmap for how we could do this:

1. Protect the Rule of Law at All Costs

2. Be a Supportive, Benevolent, and Trustworthy Trading Partner to the Global South

3. Use Intelligent Immigration Policies to Create a Tailwind for GDP Growth

4. Address the Persistent Structural Problems in Our Domestic Economy with Appropriately Sized, Decisive Action

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