(WASHINGTON, DC, UNITED STATES) – The US dollar’s status as the world’s reserve currency has peaked and is now in decline, according to Harvard economist and former IMF chief economist Kenneth Rogoff.
The US national debt recently crossed 40 trillion dollars. Interest payments on the debt are now the second largest expense in the US government budget, trailing only Social Security.
Speaking on the BBC programme The Global Story, Professor Rogoff said the dollar’s reserve status allows the United States to borrow more than other countries because the currency is held and used worldwide.
“The fact that the dollar is the reserve currency, which means it gets held all over the world. It gets used very widely, lets the United States borrow more,” Rogoff said.
He noted that global holders of dollars are now demanding higher interest rates. “The world loves the dollar, but how much? And as time has gone on, they say, ‘Well, we love you, but you know what? Please pay a higher interest rate if you want us to love you so much.'”
Rogoff said the privilege is not just about trustworthiness. Countries such as Japan and Middle Eastern states hold dollars to manage trade and finance. He said the arrangement benefits the United States through a stronger military and cheaper borrowing for all Americans, but it carries risks.
“It’s this incredible privilege. But it’s true. It puts a bit of upward pressure on the dollar. It lets us borrow more. And you can mess it up. And I think we’re in some danger of heading in that direction,” Rogoff said.
Interest payments five or six years ago were negligible. They have now risen sharply. Rogoff said influential economists including Paul Krugman and Larry Summers had argued interest rates would not rise, but they have.
Explaining the reserve currency system, Rogoff said the dollar is the common denominator of international trade and finance. He compared it to the pound sterling, which held the same role for more than a century before the dollar.
Before the pound, the Dutch guilder dominated, preceded by Spain and the Italian city states. The dollar has been on top since the Second World War, when Europe and Japan were destroyed and the United States held most of the world’s wealth, gold and industrial base.
The Bretton Woods conference in New Hampshire established the post war system. Britain’s John Maynard Keynes proposed a world currency, but the United States, represented by Harry Dexter White, insisted on the dollar.
The system fixed other currencies to the dollar, while the dollar was fixed to gold. Central banks could exchange dollars for gold. The arrangement worked during the 1950s and 1960s, but pressure grew as US spending increased under President Lyndon Johnson’s Great Society programmes and the Vietnam War.
France and other countries began demanding gold in exchange for their dollars. In 1971, President Richard Nixon suspended dollar convertibility into gold. The move shocked European allies.
Nixon’s Treasury Secretary John Connally told European officials: “It’s our dollar. It’s your problem.”
The dollar has faced serious challengers. In the mid 1980s, Japan’s stock market was worth more than the US stock market, and Japanese innovation was seen as a threat. The United States pressured Japan to revalue its currency, contributing to a financial crisis that set Japan back for two decades.
Europe then introduced the euro, which became the most serious challenger, but suffered a debt crisis in the 2010s.
Rogoff said a weaker dollar can help American exports but hurts imports. He noted that Vice President JD Vance has argued reserve currency status has downsides, including a hollowed out industrial base.
“He wants to have it both ways a little bit like a friend of mine who would say it’s too hot and too cold at the same time. He wants the dollar to be low and he wants the dollar to be high,” Rogoff said of the Trump administration’s position.
Rogoff said the move away from the dollar predates Donald Trump’s second term. China has grown too large to remain tied to the dollar. US sanctions against roughly 20 countries, including Russia and Iran, have prompted nations such as China to seek alternatives.
“It’s a little bit like if your only credit card was Mastercard and Mastercard said, ‘Sorry, you can’t use that anymore,'” Rogoff said.
He compared the situation to the fall of the Roman Empire, saying the real problems came from within.
Looking ahead, Rogoff said the dollar will remain on top but its market share will shrink. The Chinese currency, the euro and crypto will all grow in use. He estimated that roughly 20 percent of the global economy is underground, where crypto is well designed to operate.
“Has the dollar peaked? No, I think I think it has peaked. I think it peaked about 10 years ago and it’s on the way down,” Rogoff said.
He predicted a more diversified world within 10 to 20 years. Governments, not private markets, will drive the shift. China cannot allow itself to be threatened by being cut off from US banks, he said.
Rogoff also predicted the Greenland issue would resurface before Trump leaves office. He said Europeans are asking what weapons they can use against the United States and how they can protect themselves.
“Look at poor Canada right now,” he added.
The interview was broadcast by BBC News.
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