Kenneth Rogoff’s latest book, Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead, published by Yale University Press in April 2025, offers a sweeping, incisive examination of the historic rise of the US dollar and its increasingly precarious future. Drawing on his experience as a former chief economist at the International Monetary Fund and his long academic career at Harvard, Rogoff crafts a narrative that traces the dollar’s evolution into the world’s dominant currency.
The book’s title alludes to a 1971 remark by then-U.S. Treasury Secretary John Connally-“The dollar is our currency, but it’s your problem“-a phrase that encapsulates the asymmetric power the United States has long wielded in global finance.
Regarding the U.S. dollar’s role in the global economy, its dominance as the primary reserve currency has been underpinned by confidence in the stability of U.S. institutions and policies. However, recent economic strategies, including aggressive tariffs and unpredictable fiscal policies, have raised concerns about the dollar’s long-term supremacy. Analysts warn that such measures could erode trust in U.S. financial leadership, potentially leading to a gradual shift away from the dollar in global transactions.
Is the sun setting on America’s financial empire? Ken Rogoff’s theses on the American “Exorbitant Privilege”
For decades, the United States has held a dominant influence over the global financial system. Our currency, the dollar, is the one that much of international trade runs on, and our financial “plumbing” is used, to varying degrees, by almost everyone. This status has often been referred to as our “exorbitant privilege”.
But what exactly does this “exorbitant privilege” mean for the United States? Ken Rogoff, former chief economist at the International Monetary Fund and professor of economics at Harvard, explores this concept in his new book. His theses, discussed in an interview, warn that the world was already seeking alternatives to the dollar-based system, and that recent actions, particularly under the Trump administration, are stressing this system and creating “true cracks” in it.
The Benefits of the Dominant Dollar
The dollar’s dominance brings several significant benefits for the United States:
- We can borrow money at lower interest rates than we otherwise could. Rogoff estimates this saves the government between half a percent and one percent. This effect also extends to interest rates for mortgages and car loans.
- When other countries buy cash dollars, they are essentially giving us an interest-free loan. It’s estimated that at least a trillion dollars is held abroad in cash.
- During crises, the United States can borrow twice as much as most other countries without interest rates suddenly spiking. Other countries look at this and wish they could do the same.
- Because so many global transactions pass through our system, we gain information about the global economy that nobody else has. Modern intelligence relies heavily on financial information.
- We can impose economic sanctions on our adversaries in a way that no one else can. This is because other countries depend on using the U.S. banking system. Recent examples include sanctions against Iran and measures against Russia after the invasion of Ukraine, such as freezing central bank assets and causing issues with payment systems like Visa and Mastercard.
- Control of the financial system gives us bargaining power in international forums like the IMF.
This “exorbitant privilege” isn’t just theoretical; it’s a tangible advantage that has allowed the U.S. to operate in ways that would be impossible for other nations.
Why does the world use the dollar?
If dollar dominance offers the U.S. so many advantages, why do other countries participate?
- The dollar is a widely known and trusted currency globally. In the past, trust was tied to the gold standard. Today, it’s based on trust in the United States and how we manage our currency.
- In a world with over 150 currencies, the dollar acts as a “lingua franca” of international finance, simplifying transactions.
- The U.S. offers a vast amount of dollar-denominated assets (like Treasury securities) that other countries can buy. These markets are deep and liquid, meaning these assets can be sold quickly without taking a large discount. The rule of law and the openness of the financial system, allowing capital to enter and exit freely, are also important factors.
Current tensions and risks
According to Rogoff, despite the advantages, the system is under pressure. Other countries, including allies like the Europeans, dislike the power the dollar’s dominance gives the U.S.. The term “exorbitant privilege” was coined by Valéry Giscard d’Estaing, who criticized the U.S. ability to borrow cheaply and in large quantities.
A critical point is the increasing use of the U.S. financial system as a non-economic lever. The aggressive use of sanctions to achieve political goals makes the American system appear dangerous and unpredictable to other countries.
Recent actions, particularly under the Trump administration, have exacerbated these tensions. Rogoff highlights how this administration viewed dollar dominance as a burden, arguing that other countries were free-riding off it and should pay for the privilege of using it. Approaches like the unpredictable imposition of tariffs (“let’s make a deal”) undermine the trust and openness that underpin the dollar’s strength. This unpredictability is harmful to investment and trade.
Another significant risk is the potential erosion of the Federal Reserve’s independence. The central bank’s independence is crucial for stabilizing the dollar and controlling inflation. History shows that political interference with the Fed can lead to periods of high inflation. While the Fed’s independence isn’t in the Constitution and could theoretically be changed by Congress, undermining it would risk the dollar’s stability.
Finally, the high and rising U.S. public debt, coupled with increasing interest rates, makes debt management a greater challenge.
The Future: decline or redefinition?
Rogoff predicts that the world will gradually move away from the dollar. He doesn’t expect a single currency (like the Chinese Renminbi) or a cryptocurrency (like Bitcoin) to completely replace the dollar, but rather a “multipolar” scenario where different currencies gain larger market shares. The Renminbi, Euro, and cryptocurrencies will take parts of the dollar’s market share. This shift won’t happen overnight, but it’s a gradual process likely unfolding over the next 5-15 years. The loss of the “exorbitant privilege” would result in higher borrowing costs, a reduced ability to use sanctions effectively, and a weakening of national security and information gathering.
Rogoff believes recent actions have accelerated this process. A concerning signal was observed when, following some political announcements, the interest rate on 10-year Treasuries rose, but the dollar’s value fell – unusual behavior suggesting a sale of dollar assets.
According to Rogoff, the primary cause of potential decline is not bad luck, but rather policy decisions that undermine trust and stability (being incompetent). The perception of unpredictability and the potential weakening of key institutions like the Federal Reserve are seen as lasting damage to trust.
Myths to debunk: trade and jobs
Rogoff dismisses some common arguments, particularly those linking dollar dominance to the loss of manufacturing jobs in the United States. The argument that dollar dominance makes U.S. exports too expensive and imports too cheap, thereby damaging the industrial base, is considered “ridiculous” and not supported by facts. The loss of manufacturing jobs is largely due to automation and global dynamics of prices and incomes, not the dollar’s strength.
The eroding ‘Exorbitant Privilege’: risks to US National Security and global power from the wavering dollar
The dollar’s dominance means that the US currency is used for international trade and its financial plumbing is used globally. This provides the US with control over the global financial system to a remarkable degree. Losing this dominance means losing that central control.
The combination of the dollar’s rule and US military power gives the US ability in global negotiations. Financial dominance acts as non-economic leverage, allowing the US to press countries to do things it wants, such as sanctioning people or providing information. If others reduce their reliance on the dollar, this leverage diminishes.
A key aspect of this power is the ability to wrap sanctions around enemies in a way no one else can. Because everyone has to use the US banking system, the US can impose devastating sanctions, even on countries that disagree with US policy. For example, the US was able to apply sanctions on Iran even when European countries didn’t agree, by threatening access to the US banking system. The sources note that other countries, like Russia and China, hate this power. If the dollar loses its magnitude, the ability to use sanctions effectively is significantly reduced. The freezing of Russia’s central bank assets after the Ukraine invasion showed other countries, particularly China, the potential risk of holding dollars, prompting them to look for alternatives.
The US gets privileged access to information about the global economy that nobody else knows. Much of modern intelligence is cyber-based, and a significant portion comes from financial information that flows through the US system. If countries move away from the dollar system, this vital source of financial information for intelligence gathering is lost.
Historically, the US has been able to use control over funding as leverage, such as during the 1956 Suez crisis where the US called in the UK’s loan to pressure them. Losing financial dominance means losing this specific type of control over other nations’ funding.
The US’s financial and military strength allows it to be the “boss” and control things in global structures, such as controlling NATO missions. As other countries potentially build their own financial systems or militaries in response to perceived US unpredictability or demands for “tribute”, this dynamic could change.
The global financial system may be heading toward a multipolar configuration, where the U.S. dollar steadily loses ground to the euro, China’s renminbi, and various digital currencies. Such a transformation could erode U.S. national security and weaken its ability to project power internationally.
Being able to borrow a lot when really needed is a significant benefit of dollar dominance. Losing this “exorbitant privilege” means losing some of this ability. A weaker national security might also necessitate spending more money in other ways.
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Ken Rogoff’s book offers a deep analysis of the benefits of dollar dominance for the United States and issues a clear warning: this valuable “exorbitant privilege” is not immutable. Global tensions and domestic policies that undermine trust and stability are prompting other countries to seek alternatives, potentially jeopardizing an economic and geopolitical advantage the U.S. has enjoyed for decades. History has shown that seemingly dominant economic powers (like Japan or Europe in the past) can lose momentum; the U.S. could face a similar period if it fails to manage the current challenges.
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Note:
David Ricardo’s theory of comparative advantage, introduced in 1817, remains a cornerstone of international trade economics. It posits that even if one country is more efficient in producing all goods (absolute advantage), mutual benefits from trade can still arise if each country specializes in producing goods for which it has the lowest opportunity cost. This principle underscores the importance of specialization and trade based on relative efficiency rather than absolute productivity.
The theory of comparative advantage relies on a series of restrictive assumptions—such as immobile capital, absence of externalities, full employment, and negligible distributional effects. When these conditions are not met, which is often the case in real-world economies, the predictive power and normative appeal of the theory weaken significantly. In practice, trade can generate imbalances, increase inequality, displace workers without adequate reallocation, and lock countries into low-growth sectors. As such, the case for free trade based solely on comparative advantage is contingent and context-dependent, rather than universally valid.