One-sided takes on the dollar are overwhelming social media. After running into the fourth or fifth prediction about the imminent death of the dollar one day last week, I was forced to cut into my self-prescribed Easter break to try and present the bigger picture on X.
You can see the related chain of impulsive posts here:
My view is not that things are not changing. They are. But things are far more nuanced than people appreciate about the dollar. Furthermore, I don’t say any of this because I am some sort of ideologue or USD maxi. I say it because I try to be a realist. And the reality is that none of these changes are as bad for the USA as they are for the rest of the world.
A French publication called Atlantico later got in touch asking me for a broader interview about these thoughts. They kindly shared the English transcript before publishing the interview in French on their website. I thought I would share the English version with readers. It is below.
Atlantico : Since the weekend, we have seen a new wave of articles proclaiming the “death of the petrodollar.” What is your initial reaction? Do you find this narrative original or, on the contrary, very belated?
Izabella Kaminska : There has indeed been a deluge of articles proclaiming the death of the petrodollar. However, my reaction is that this narrative is about eleven years too late. The decline of the petrodollar dates back to 2014–2015, when OPEC lost a significant portion of its leverage due to American energy independence. The key turning point occurred many years ago, and since then we have observed a gradual unwinding of the petrodollar system, culminating in the current fiscal situation in Saudi Arabia, which is quite weak. There are also broader indicators suggesting a relative weakening of the Gulf states compared with their position ten or eleven years ago.
- You explain that the real turning point dates back to 2015. But if the recycling of petrodollars has indeed decreased, what, in your opinion, has taken its place in global dollar flows? Shouldn’t we be talking about “sweat dollars” today?
Petrodollars were only one channel through which dollars entered the international monetary system. Another major channel through which dollars circulated globally was through payments to mercantilist sovereigns. I refer to this as “sweat dollars.” The idea is that certain sovereign states compete in international markets not through innovation or quality, but by leveraging cheap labor in a way that allows them to extract value from more developed economies.
This arrangement has effectively driven the accumulation of large dollar reserves in countries such as China, which were then deployed in Belt and Road countries as China sought to diversify its position and move up the value chain. This process is closely linked to currency manipulation and the financial repression of domestic populations.
As a result, a continuous flow of dollars leaves the United States and enters these economies, where it must be recycled. Within a mercantilist framework, this recycling typically takes the form of reinvestment into US dollar-denominated debt, rather than domestic consumption or private-sector investment. This model has functioned as a form of effective subsidy. I describe it as a subsidy, but it is essentially a mechanism for extracting economic rent from the United States. As long as US Treasuries offer positive yields, accumulating them in large quantities to weaken one’s own currency effectively amounts to extracting rent from US taxpayers.
- Ultimately, beyond petrodollars or sweat dollars, what truly explains the dollar’s persistence as the dominant currency? Is it ultimately more about who enforces property rights worldwide, and the fact that the United States is transforming its “exorbitant privilege” into a service billed at its true value?
I think the original arrangement is fundamentally about the certainty of property rights. Very few powers, after the Second World War, were able to defend property rights in international capital markets in the way the United States has. The British were previously the dominant power, and the French to a certain extent as well, but this shifted after the war due to the overwhelming military dominance of the United States.
In short, during the struggle for supremacy between the Soviet Union and the United States, the international capital market system naturally gravitated toward the dollar. The Soviet Union was never in a position to guarantee property rights, as this was fundamentally incompatible with its system. As a result, there were very few viable alternatives.
In the case of Saudi Arabia, where the petrodollar system originates, accepting dollars implies trust that property rights will be upheld beyond domestic jurisdiction. It is important to emphasize that petrodollars were not solely reinvested in US Treasuries or government debt. A significant portion of Saudi revenues was also invested in the private sector, in Europe, in equities, and across a wide range of asset classes. The purchase of US Treasuries was only one component of a broader arrangement. This system ultimately relies on a guarantor capable of defending the property rights associated with these investments.
It is therefore in the interest of such countries to contribute, at least in part, to financing the US government so that its military capabilities can be maintained. This military power underpins the broader system that protects property rights, ensuring the continued effectiveness of US defense structures.
However, under this arrangement, and given the leverage that Saudi Arabia derived from its natural resources, the United States was effectively paying a form of rent in exchange for access to those resources. While the system contributed to funding the US military, it was not without cost. The United States was effectively underwriting the system.
What has changed is that the United States no longer needs to incur the same costs to secure the resources required to maintain its military advantage. It is now in a position to charge third parties a form of rent, creating what can be described as a market for defense. This shift reflects the disappearance of the mechanisms that previously gave other countries leverage over the United States, notably in the domains of energy and, more recently, capital flows that supported the Chinese mercantilist model.
In this context, a market for security has effectively emerged within the international capital system, where different countries must choose their preferred provider.
This can be described in various ways: “exorbitant privilege as a service,” “security as a service,” or other formulations. What matters is that such a market now exists. The advantage of aligning with the United States, rather than with China, which is also becoming active in this space, lies in the legal and institutional framework underpinning property rights. The United States offers a more reliable system in this regard, whereas China’s track record remains less robust.
For international investors, this makes partnership with the United States more attractive than with China. Europe, for its part, does not face a problem of property rights but rather a lack of sufficient security capabilities. Should Europe significantly strengthen its military capacity, the balance could shift. At present, however, this is not the case.
As a result, the market is primarily dominated by the United States and China. Russia plays a more limited role, despite being a provider of security, due to its less reliable record in respecting property rights.
Ultimately, the enduring appeal of the dollar for investors lies in its legal jurisdiction, its commitment to free markets, and its institutional framework designed to preserve and enforce property rights.
- If we follow your reasoning, this means that the dollar system is undergoing a bifurcation. What concrete consequences do you foresee for the United States - its growth and that of its true allies on the one hand, and for the rest of the world on the other?