It powers global trade and secures U.S. privilege—but the dollar’s double role is fraying. As geopolitics shift and deficits deepen, can the dollar remain both sovereign and supranational?
While it is true that the dollar serves mutually contradictory purposes, nobody of influence and authority wants a replacement for the dollar or a dollar crash or whatever.
What China is doing is re-hypothecating their USA Treasury bonds instead of selling them. That is, they give the bond to a USA bank as collateral for a loan at a slightly higher interest rate than the bond, so a risk free and lucrative deal for the USA bank. Then China transfers their dollars at the USA Bank to (for example) a Peruvian company in exchange for dollar denominated bond backed by Peruvian mining assets or for equity in the mine or combination of debt and equity. Now what happens if USA confiscates the Treasury bonds owned by China, like they did with Russia? Then the Chinese default on their loan to the USA bank. The USA bank still has the USA treasury bins as collateral, so USA could majeyan exception for that particular bond, but if we are talking about dozens of banks and thousands of such loans, that creates a paperwork nightmare that will throw a monkey wrench into the USA financial system, and the USA banks know this and will thus stop any attempt to sanction China.
In effect, China is allowing the existing $30 trillion or whatever of USA debt to stand as is, as world rather than just USA fiat money, but also creating a situation where USA will be unable to create much more of this fiat money and also will be unable to repudiate the existing debt without blowing up its financial system. Combination of unable to create more debt and unable to repudiate existing debt and thus forced to service (pay interest) on existing debt means USA will be forced to balance its current account and reduce its budget deficit, and that unleashes the mess in my other comment, because the USA has a massive asset bubble. Canada and Europe are also in a mess. There's going to be a lot of financial pain in the asset bubble economies in the years ahead.
Thank you for the thoughtful and detailed reply. You raise some compelling issues—particularly the point about how the seizure of Russia’s reserves has redefined geopolitical risk in the dollar system. That moment did, in many ways, weaponize reserve assets and forced other nations to reassess the security of their holdings. It’s a key inflection point, and you’re right to highlight its long-term significance.
I also agree strongly with your observation that asset-heavy economies like the U.S., Canada, and Europe are now structurally vulnerable. As I touched on in the essay, a system built on inflated financial assets and external deficits cannot easily shift toward production and balance without real pain—and not just on Wall Street. This is a slow-burning but serious fragility.
That said, I would take a different view on China’s strategic position. While the financial engineering scenario you describe—re-hypothecation of Treasuries to facilitate outbound investments—is technically plausible, I think it overstates both the scale and systemic impact of such practices. Sovereigns like China are generally cautious with how they handle reserve assets, especially U.S. Treasuries, which remain one of the few truly liquid, globally accepted stores of value. There may be isolated cases of Treasury-backed transactions, but it’s unlikely to be a central plank of Chinese strategy.
More importantly, I believe China has every incentive—at least for now—to preserve and extend the current dollar system, not constrain it. Why would China want to disrupt a system that currently empowers it? The existing regime, in which the U.S. runs persistent trade deficits in exchange for financial inflows, is extraordinarily useful to China. It allows Beijing to accumulate geopolitical leverage—through outbound investment, resource acquisition, and diplomatic influence—while the U.S. absorbs the dislocations of deindustrialization, wage stagnation, and social division. The longer this asymmetry endures, the more China can build its strategic position without provoking open confrontation.
Put differently, the global dollar system as currently constructed weakens American cohesion and power projection even as it appears, on the surface, to reaffirm U.S. financial dominance. Why would China rush to overturn that? A dollar collapse or a forced fiscal reckoning in Washington might sound attractive in theory, but it would come with enormous collateral damage to global demand, commodity markets, and China’s own export machine. Beijing’s ideal scenario is one of gradual erosion—not rupture.
So while it’s important to explore new forms of monetary diplomacy and financial architecture (including alternatives like BRICS cooperation), I suspect China’s near-term strategy is to keep the dollar regime afloat—just weakened, distracted, and increasingly unbalanced. This isn’t about swinging a wrecking ball; it’s a termite strategy: slowly hollowing out the structure from within while benefiting from the cover it provides. It’s a game of long-term inversion, not immediate disruption.
Financial engineering where Treasuries are pledged as collateral at a USA bank for loans accomplishes what you are saying. The alternative is to sell the Treasuries to the USA bank. In both cases, China now has a USA dollar account at the USA bank which it can transfer to another country. However, selling massive numbers of treasuries risks raising alarms in USA government, whereas merely pledging them as collateral doesn't, unless the USA government thinks carefully. China is indeed trying to preserve the existing system while hollowing it out from within.
China has no need for the liquidity of un-hypothecated Treasuries, given China’s enormous trade surpluses. China is constantly getting more dollars and other western currencies and their problem is what to do with them all.
China’s overriding imperative in managing its accumulation of Western currencies is to avoid repeating the classic error made by previous capitalist hegemons: investing their surplus capital into the rising node of production in search of higher returns. From Venice to Amsterdam, Amsterdam to London, London to New York, and now New York to Beijing, history has shown that the incumbent capitalist core often ends up financing its own replacement. Each dominant power, in chasing profit, inadvertently nourishes the very system that will eclipse it. Aware of this pattern, China is likely to be far more cautious when it comes to investing in India or other emerging economies with the potential to replicate its own manufacturing ascendancy. When the time eventually comes for China to confront the pressures of financialization and deindustrialization, it will want to ensure that it hasn’t, like its predecessors, unwittingly cultivated its own successor.
The world doesn't need an alternative to dollars for temporary liquidity, because there are a boatload already in existence (USA debt is already 100% of GDP) and those can be multiplied into Euro dollars or other types of credit instruments. What will eventually happen is that people worldwide will come to think that owning hard assets (buildings, factories, infrastructure, mines) is better than owning dollar denominated credit instruments subject to counterparty and dollar devaluation risk, and that will result in wholesale repudiation of the dollar in favor of creating these hard assets. People will trade their dollars for whatever USA can export (mostly commodities like oil, natural gas, mining products, timber, agricultural products, bulk chemicals, etc) to support process of creating hard assets.This will cause US dollar to crash as some rush to exchange dollars for other currencies, USA exports and inflation to soar as other rush to spend dollars in USA buying those commodities just listed, USA imports and financial assets to crash, USA current account deficit to end. USA budget deficit is an internal matter: either cut it or inflation becomes extreme. Typical financial crisis, as seen in Britain, Argentina, Turkiye, etc, etc.
tl:dr: there is nothing magical about US dollars any more than gold or beanie babies or bitcoin. Price is high only as long as everyone agrees it is high, and that isn't necessarily forever, as the examples of beanie babies or gold in the years 1980->2000 show.
While it is true that the dollar serves mutually contradictory purposes, nobody of influence and authority wants a replacement for the dollar or a dollar crash or whatever.
I agree and was certainly hinting at the fact that China has no interest in overturning the current system/
What China is doing is re-hypothecating their USA Treasury bonds instead of selling them. That is, they give the bond to a USA bank as collateral for a loan at a slightly higher interest rate than the bond, so a risk free and lucrative deal for the USA bank. Then China transfers their dollars at the USA Bank to (for example) a Peruvian company in exchange for dollar denominated bond backed by Peruvian mining assets or for equity in the mine or combination of debt and equity. Now what happens if USA confiscates the Treasury bonds owned by China, like they did with Russia? Then the Chinese default on their loan to the USA bank. The USA bank still has the USA treasury bins as collateral, so USA could majeyan exception for that particular bond, but if we are talking about dozens of banks and thousands of such loans, that creates a paperwork nightmare that will throw a monkey wrench into the USA financial system, and the USA banks know this and will thus stop any attempt to sanction China.
In effect, China is allowing the existing $30 trillion or whatever of USA debt to stand as is, as world rather than just USA fiat money, but also creating a situation where USA will be unable to create much more of this fiat money and also will be unable to repudiate the existing debt without blowing up its financial system. Combination of unable to create more debt and unable to repudiate existing debt and thus forced to service (pay interest) on existing debt means USA will be forced to balance its current account and reduce its budget deficit, and that unleashes the mess in my other comment, because the USA has a massive asset bubble. Canada and Europe are also in a mess. There's going to be a lot of financial pain in the asset bubble economies in the years ahead.
Thank you for the thoughtful and detailed reply. You raise some compelling issues—particularly the point about how the seizure of Russia’s reserves has redefined geopolitical risk in the dollar system. That moment did, in many ways, weaponize reserve assets and forced other nations to reassess the security of their holdings. It’s a key inflection point, and you’re right to highlight its long-term significance.
I also agree strongly with your observation that asset-heavy economies like the U.S., Canada, and Europe are now structurally vulnerable. As I touched on in the essay, a system built on inflated financial assets and external deficits cannot easily shift toward production and balance without real pain—and not just on Wall Street. This is a slow-burning but serious fragility.
That said, I would take a different view on China’s strategic position. While the financial engineering scenario you describe—re-hypothecation of Treasuries to facilitate outbound investments—is technically plausible, I think it overstates both the scale and systemic impact of such practices. Sovereigns like China are generally cautious with how they handle reserve assets, especially U.S. Treasuries, which remain one of the few truly liquid, globally accepted stores of value. There may be isolated cases of Treasury-backed transactions, but it’s unlikely to be a central plank of Chinese strategy.
More importantly, I believe China has every incentive—at least for now—to preserve and extend the current dollar system, not constrain it. Why would China want to disrupt a system that currently empowers it? The existing regime, in which the U.S. runs persistent trade deficits in exchange for financial inflows, is extraordinarily useful to China. It allows Beijing to accumulate geopolitical leverage—through outbound investment, resource acquisition, and diplomatic influence—while the U.S. absorbs the dislocations of deindustrialization, wage stagnation, and social division. The longer this asymmetry endures, the more China can build its strategic position without provoking open confrontation.
Put differently, the global dollar system as currently constructed weakens American cohesion and power projection even as it appears, on the surface, to reaffirm U.S. financial dominance. Why would China rush to overturn that? A dollar collapse or a forced fiscal reckoning in Washington might sound attractive in theory, but it would come with enormous collateral damage to global demand, commodity markets, and China’s own export machine. Beijing’s ideal scenario is one of gradual erosion—not rupture.
So while it’s important to explore new forms of monetary diplomacy and financial architecture (including alternatives like BRICS cooperation), I suspect China’s near-term strategy is to keep the dollar regime afloat—just weakened, distracted, and increasingly unbalanced. This isn’t about swinging a wrecking ball; it’s a termite strategy: slowly hollowing out the structure from within while benefiting from the cover it provides. It’s a game of long-term inversion, not immediate disruption.
Financial engineering where Treasuries are pledged as collateral at a USA bank for loans accomplishes what you are saying. The alternative is to sell the Treasuries to the USA bank. In both cases, China now has a USA dollar account at the USA bank which it can transfer to another country. However, selling massive numbers of treasuries risks raising alarms in USA government, whereas merely pledging them as collateral doesn't, unless the USA government thinks carefully. China is indeed trying to preserve the existing system while hollowing it out from within.
China has no need for the liquidity of un-hypothecated Treasuries, given China’s enormous trade surpluses. China is constantly getting more dollars and other western currencies and their problem is what to do with them all.
China’s overriding imperative in managing its accumulation of Western currencies is to avoid repeating the classic error made by previous capitalist hegemons: investing their surplus capital into the rising node of production in search of higher returns. From Venice to Amsterdam, Amsterdam to London, London to New York, and now New York to Beijing, history has shown that the incumbent capitalist core often ends up financing its own replacement. Each dominant power, in chasing profit, inadvertently nourishes the very system that will eclipse it. Aware of this pattern, China is likely to be far more cautious when it comes to investing in India or other emerging economies with the potential to replicate its own manufacturing ascendancy. When the time eventually comes for China to confront the pressures of financialization and deindustrialization, it will want to ensure that it hasn’t, like its predecessors, unwittingly cultivated its own successor.
The world doesn't need an alternative to dollars for temporary liquidity, because there are a boatload already in existence (USA debt is already 100% of GDP) and those can be multiplied into Euro dollars or other types of credit instruments. What will eventually happen is that people worldwide will come to think that owning hard assets (buildings, factories, infrastructure, mines) is better than owning dollar denominated credit instruments subject to counterparty and dollar devaluation risk, and that will result in wholesale repudiation of the dollar in favor of creating these hard assets. People will trade their dollars for whatever USA can export (mostly commodities like oil, natural gas, mining products, timber, agricultural products, bulk chemicals, etc) to support process of creating hard assets.This will cause US dollar to crash as some rush to exchange dollars for other currencies, USA exports and inflation to soar as other rush to spend dollars in USA buying those commodities just listed, USA imports and financial assets to crash, USA current account deficit to end. USA budget deficit is an internal matter: either cut it or inflation becomes extreme. Typical financial crisis, as seen in Britain, Argentina, Turkiye, etc, etc.
tl:dr: there is nothing magical about US dollars any more than gold or beanie babies or bitcoin. Price is high only as long as everyone agrees it is high, and that isn't necessarily forever, as the examples of beanie babies or gold in the years 1980->2000 show.