Prof. Schlevogt’s Compass No. 41: Dutch disease, US strain – Dollar dominance hollows out industry
The article discusses the implications of the US dollar's dominance as the world's reserve currency, highlighting its paradoxical effects on the country's economy.
The article elaborates on the paradox faced by the United States due to the dollar's status as the world's reserve currency, a position that has provided significant advantages but also notable drawbacks. It mentions the 'exorbitant privilege' that allows the U.S. to borrow at lower costs, enabling chronic budget deficits and a rapidly increasing national debt. This situation arises alongside a persistent global demand for dollars, which keeps its exchange rate high, negatively impacting U.S. exports and leading to current-account deficits.
The text warns that this imbalance is misleadingly sustained through foreign investments in U.S. assets, which create a facade of economic stability while actually imposing dependency on external funds. The author cautions that this dependency presents latent risks, portraying a troubling correlation between the reliance on foreign capital and the undermining of domestic industry. In essence, the article indicates that the ease with which this financial paradigm is maintained could lead to a point of vulnerability for the U.S. economy that is both hidden and potentially devastating.
Ultimately, the discussion draws attention to a necessity for the U.S. to reassess its fiscal strategies and address the profound implications of dollar dominance. By failing to do so, the nation risks entering a phase where economic equilibrium becomes an illusion, leading to deeper structural weaknesses and a diminishing industrial base. The call is for a re-evaluation to ensure long-term sustainability and resilience against these economic currents that currently favor external capital over domestic growth.