The exorbitant privilege of the dollar is very much in the spotlight in 2025 with President Trump vowing to defend the international position of the greenback to the point of branding the BRICS as being “anti-dollar” and threatening to impose higher tariffs on those economies that seek to de-dollarize. But is the scale of the “exorbitant privilege” all that great and are the stakes that high for the US in the transition of the global economy away from the USD-centered system? And if such a transition is already underway, then what are the implications for the global economy from the shift away from dollar centricity? In fact, some of the most insightful assessments of the dollar’s plight come from the US economists, including the former Fed Chairman Ben Bernanke. And on balance with key estimates from the US considered, the scale of the “exorbitant privilege” is not as meagre as some of the observers suggest.
Among the commentators that see the US dividends from the dollar’s “exorbitant privilege” as being modest at best is Ben Bernanke – in his words, ““overall, the fact that English is the common language of international business and politics is of considerably more benefit to the United States than is the global role of the dollar. The exorbitant privilege is not so exorbitant anymore”[1].
One of the benefits for the US according to B. Bernanke is that due to the reserve status of the dollar the US derives interest savings that are moderate in size however: “a great deal of U.S. currency is held abroad, which amounts to an interest-free loan to the United States. However, the interest savings are probably on the order of $20 billion a year, a small fraction of a percent of U.S. GDP, and that “seigniorage,” as it is called, would probably still exist even if the dollar lost ground to other currencies in more-formal less informal international transactions”[2].
Another benefit enjoyed by the US according to Ben Bernanke, is that “U.S. firms may face slightly less exchange-rate risk in international transactions, but that benefit should not be overstated since the dollar floats against the currencies of most of our largest trading partners”. In fact, there may be even some negatives for US corporates: “the safe haven aspect of the dollar is actually a negative for U.S. firms, since it implies that they become less competitive (the dollar is stronger) at precisely the times that global economic conditions are most difficult”[3].
All in all, the benefits of the exorbitant privilege are moderate and the competition from other currencies is making these dividends even smaller: “The tangible benefits to the U.S. of issuing the world’s principal reserve currency—the “exorbitant privilege”—have, I think, been significantly eroded by the greater actual or potential competition from other currencies, such as the euro and the yen, and by America’s shrinking share of the global economy”[4].
A somewhat different perspective on the scale of the benefits accruing to the US from the dominant position of the dollar is provided by Warren Coats, a US economist specializing in monetary policy. In his view, there are sizeable benefits accruing to the US from its ability to conduct fiscal outlays via accumulating debt: “The so-called exorbitant privilege of a reserve currency–the ability to borrow abroad in your own currency–makes it easier for the U.S. government to finance its military and other expenditures with debt. For countries to accumulate dollar reserves they must have a balance of payments surplus, i.e., they must sell more to the U.S. than they buy from the U.S. As a result, Americans enjoy cheaper imports and the excess of dollars paid for such imports over those paid back for US exports are held in foreign reserves (generally in the form of US treasury debt)[5].”
The reserve status of the US dollar serves to perpetuate elevated levels of the trade deficit that is more easily financed with inflows from abroad. This foreign financing acts essentially as a substitute for higher taxes or spending cuts – in essence the “dollar privilege” expands the fiscal maneuver for the US in reconciling domestic and foreign economic priorities: “The U.S. dollar’s dominance in global trade and finance contributes to the existence of the American Empire in two ways. It attracts foreign financing of the U.S. government and its military industrial complex thus reducing the burden of the empire on the American taxpayer and it provides a tool by which the U.S. can impose its will on other countries or individuals in managing its empire. Borrowing to pay our government’s bills is politically easier than raising taxes and avoids (or delays) a debate over guns versus butter”[6].
The exact scale of how significant this effect of greater fiscal maneuver is for the US economy is hard to quantify, but another important qualitative aspect of this market’s benevolence with respect to dollar debt is the scope provided to the US to consistently keep raising the debt ceiling without triggering a sovereign default. The interest that the US pays on its debt is lower due to the availability of capital inflows from abroad compared to a scenario of no “exorbitant privilege”. But according to Warren Coats, “Uncle Sam’s debt service payments are likely to double or triple over the next five to ten years, rising to 15% to 20% of the Federal budget. The world still expects the US to regain control of its spending, but the risks of default are creeping up. Paul Samuelson stated in 2005 that at some uncertain future period these pressures would precipitate a run against the U.S. dollar with serious global financial consequences.[7]”
In a way, the higher goes the debt ceiling and the greater the total debt load, the more the US economy becomes dependent on the maintenance of the dollar’s “exorbitant privilege”. This privilege is a factor that in effect postpones the necessary adjustment in US fiscal policy and creates something akin to “soft budget constraints” – a phenomenon that was attributed to Russia and other transition economies in the 1990s. The longer the “privilege”-induced debt pile-up, the greater and the more painful the eventual adjustment[8]. Another way to assess the effects of the dollar privilege is via the concept of moral hazard, whereby US corrective action is delayed due to the presence of a “safety net” created by the high dependency of the world economy on the dollar[9]. In this context, with yet another shutdown coming to pass this year, rating agencies and international organizations such as the IMF could well increasingly assess the US debt sustainability (a regular exercise in the Fund’s Article IV reviews) under the stress conditions of a dissipating “dollar privilege” and the declining availability of debt financing from abroad[10].
As for the BRICS, the largest economies of the bloc such as China and India are unlikely to press for high-speed de-dollarization. This may be partly due to the still significant economic ties of both countries to the US economy – whether in trade or in the financial sphere in terms of the scale of investments into dollar-denominated assets. Another factor is the presence of capital controls that may lengthen the process of the internationalization of the respective EM currencies. What this suggests is that the future role of the dollar in the global economy rests largely in the hands of the US itself, with a strong track-record of fiscal policy and an exemplary operation of fiscal rules to keep a lid on the public debt pile-up being the securest of venues to advance the dollar’s international stature. Maintaining strong economic linkages with the world economy, including the fast-growing economies of the Global South, as well as de-politicizing the US dollar internationally may also prove critical in reversing the unfavorable trends faced by the US currency in global markets.
[1] https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-dollars-international-role-an-exorbitant-privilege-2/
[2] https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-dollars-international-role-an-exorbitant-privilege-2/
[3] https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-dollars-international-role-an-exorbitant-privilege-2/
[4] https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-dollars-international-role-an-exorbitant-privilege-2/
[5] https://www.brettonwoods.org/article/the-empire-and-the-dollar
[6] https://www.brettonwoods.org/article/the-empire-and-the-dollar
[7] https://www.brettonwoods.org/article/the-empire-and-the-dollar
[8] Much as in the case of the accumulation of high global imbalances. Indeed, such phenomena as “global imbalances” or Lucas paradox may be attributable in part to the privileged role of the dollar in the global economy.
[9] https://moderndiplomacy.eu/2023/02/03/from-unidimensional-to-3d-the-contours-of-the-post-bretton-woods-world/
[10] https://am.jpmorgan.com/hk/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/what-are-the-implications-of-moodys-downgrade-of-the-us/
Yaroslav Lissovolik, Founder, BRICS+ Analytics
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