Written by:

Dr. Patrick Chi-Ping HO

Member, Chinese Association of Hong Kong and Macao Studies.

Dr. Gal LUFT

Author of “De-Dollarization”



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The hegemony of the US dollar (the dollar) over the global monetary system is the single most important source of America’s power today—more so than its military. If not for the special status of the dollar, the United States would not be able to run the very same deficits that have enabled it to sustain the nearly one trillion dollar a year national defense complex which provides security not only to Americans but also to much of the rest of the world. But this can only last as long as its economy is strong, and the economy can only remain strong as long as the dollar retains its strategic status.

Historian Paul Kennedy demonstrated in his book The Rise and Fall of the Great Powers that imperial decline typically happens when an empire overstretches and can no longer afford to maintain its military power.


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This means that if the dollar were to lose its preeminence, America’s ability to defend itself and the free world would, too, erode. History has issued a very clear verdict on this. In the past six centuries, six currencies held global reserve status—the Portuguese escudo, the Spanish peso de ocho, the Dutch guilder, the French franc, the British pound and, most recently, the U.S. dollar. Each occupied the throne for roughly 80-100 years, corresponding with its country’s international preeminence. In each one of the cases, when the empire began its decline, its currency lost its appeal as doubts began to creep about the empire’s health, credibility and longevity, denying the empire the ability to attract foreign investment and to borrow the money needed for it to keep up its imperial obligations and upkeep, especially for the military that made imperial gains possible to begin with. Sensing the empire’s decline, challengers began to rear their heads. This triggered fierce competition, arms race and wars. Beyond a certain point, with its currency losing much of its value, the empire could no longer handle the internal and external pressures, and it collapsed onto itself.

Drawing from the experience of the fall of the Habsburg Spanish, Bourbon French and British Empire, historian Niall Ferguson observed that empires fracture and fall when the cost of servicing their debt surpasses their defense budget.


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It is worth reflecting on the fate of the British Empire. Until World War I, payments for the annual interest on its debt stood at 2 percent of its GDP. By 1933, the year Adolf Hitler came to power in Nazi Germany, the cost of servicing the British debt was nearly 10 percent, denying Britain the necessary resources to prepare itself for the coming war.

Is America getting close to this point when the cost of servicing their debt surpasses their defense budget? Even in the last decade with relatively low interest rates, the United States spends $1.5 billion every single day on interest payments!

Most recently, the US Federal Reserve sets the target range for the federal funds rate to between 5.00 and 5.25 percent — a 16-year high. It reflects the third time the central bank has raised rates this year (following seven raises in 2022 after the President’s arduous efforts of holding them close to zero since the onset of the pandemic).


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However, as interest rates on U.S. Treasury securities rise, so too will the federal government’s borrowing costs. The United States was able to borrow cheaply to respond to the pandemic because interest rates were historically low. However, as the Federal Reserve increases the federal funds rate, short-term rates on Treasury securities will rise as well — making some federal borrowing more expensive. Expectations about short-term rates and inflation have already pushed up longer-term rates as well.

In February, the Congressional Budget Office (CBO) projected that annual net interest costs would total $640 billion (2.4%GDP) in 2023 and double over the upcoming decade, soaring from $739 billion in 2024 to $1.4 trillion in 2033. However, if inflation is higher than CBO’s projections and if the Fed raises interest rates by larger amounts than the agency projected, such costs may rise even faster than anticipated.


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As of 10 March 2023 the FY2023 presidential military budget request was $842 billion (3.4%GDP). In January 2023 Treasury Secretary Janet Yellen announced the US government would hit its $31.4 trillion debt ceiling on 19 January 2023.

The long-term fiscal challenges facing the United States are serious. Significant borrowing was necessary to respond to the COVID-19 pandemic and the aftermaths; however, the structural imbalance between spending (6.9 trillion/yr) and revenues (5.5 trillion/yr) that existed before the pandemic is still large and will grow rapidly in the future (at a rate of 1.4 trillion in deficit/yr). Furthermore, as interest rates rise and the nation’s debt grows, it will become even more expensive to borrow in the future. Congresses and Presidents of both parties, over many years, have avoided making hard choices about their budgets and growing debts, and failed to put them on a sustainable path to ensure a stable economic future.


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An empire always thinks it can afford to make mistakes or incur additional costs. It thinks it is so powerful that this won’t change anything. But those mistakes and costs keep piling up. At some point, the empire can’t deal with them both in terms of security and the economy. That’s what the Americans are doing. They’re undermining trust in their dollar as a universal payment instrument and the main reserve currency. So the rest of the world started thinking of a plan B.

Edited by Fangfang

proofreaded by Wang Yan