The biggest threat to the dollar’s importance is not foreign rivals, but domestic populists, fighting the wrong war with the wrong weapons.
The dominance of the dollar as a reserve currency enhances financial power, but it does so by shifting the balance of the economy from manufacturing to paper. As America’s manufacturing base hollows out gradually and unevenly, its national cohesion and physical prowess, the two central pillars of power, begin to erode.
Over time, corrosive forces infiltrate politics, rising from the grassroots to the national stage. In the end, the biggest danger to a dollar-based global order is the American electorate, who will have to live with its consequences.
The political costs of hollow power
American communities built around tradable industries find the dollar-based reserve-currency system less stable than a source of permanent headwinds: lost contracts, closed factories, and a relentless fight against a structurally inflated dollar they never chose to face.
The gains of dollar hegemony accrue quietly in the rarefied citadels of high finance, technological properties and largely invisible to the public. On the contrary, its costs are spread throughout the local economy, visible to all, and deeply personal to those who must bear them. It is within this wide chasm between noble monetary privilege and common economic experience that a popular revolt begins to take shape.
Real-estate tycoon and reality-TV showman Donald Trump led a revolt against the elite, but he also rebelled against the elite. He built an extraordinary election campaign on the baseless assertion that America’s economic collapse was caused by foreign fraud and the hope that tariffs could reverse the damage. Once in office, the rebel-turned-president translated that premise and pledge into policy, launching sweeping trade wars sold as industrial renewal.
Finally, the mercantilist in chief trades in demiurgic illusion, resorting to classic tactics from the popular playbook. Populism consists in exploiting complex structural tensions through misleading simplicity in competing narratives, arguably the essence of politics: facile solutions based on false diagnoses and false attributions.
In practice, populism reduces real grievances to seductive, prefabricated stories of archetypal villains and religious victims, rampant betrayal and seductive promises of destructive and effortless restoration.
Weaponized economics backfires
What began as an election narrative promoted by an iconoclastic maverick—that foreign rivals were exploiting America—evolved into a dangerous policy. It turned structural economic imbalances into political weapons of mass destruction, economically counterproductive and ultimately self-defeating.
No matter how much Trump portrays tariffs as a panacea and deploys them as his preferred policy weapon, they cannot override the structural realities of the reserve currency and address the systemic tensions generated by global dollar dominance. Behind America’s trade gaps lies not foreign malfeasance and predation but a structural logic inherent in issuing the world’s reserve currency.
Tariffs cannot neutralize a systematically overvalued dollar. They cannot restore competitiveness in a system that absorbs the US as the world’s last resort for additional global savings. Least of all can they succeed when expansive monetary policy continues to exacerbate underlying distress.
At best, tariffs serve as a blunt and expensive substitute for market-driven exchange rate adjustment, changing who bears the burden of the financial system rather than changing the structural forces that actually drive trade imbalances.
Tariffs essentially reconfigure trade flows, redirecting resources toward politically protected industries but imposing deadweight losses—totally disappearing value—on the broader economy. Tax the many to subsidize the few, provide temporary relief to inefficient upstream firms by raising import prices, at the cost of disrupting supply chains, burdening downstream industries with higher input costs, raising prices for consumers, and provoking retaliation abroad.
In essence, Trump’s tariffs target the wrong problem, treat the symptom — allegedly unfair trade — rather than the underlying macroeconomic cause — the structural monetary condition — and deepen the distortions they claim to correct.
Mainstream macroeconomic theory holds that a country’s trade balance is determined primarily by the gap between national saving and investment, not by the tariffs it charges. A country that invests more than it saves must borrow the difference from abroad and show the debt as a trade deficit regardless of trade barriers.
Standard open-economy models show that tariffs raise the real exchange rate, erode competitiveness, and leave the overall trade balance largely unchanged in the long run. This dynamic can exacerbate the imbalances they seek to correct.
This happens when tariffs raise domestic prices, attract additional capital and push the dollar even higher, thereby offsetting any protectionist or competitive gains and reinforcing the pressures they are intended to relieve. In a reserve-currency economy, those underlying forces are further amplified. The US is a textbook case.
Sustained foreign demand for dollar assets channels capital into US markets, sustaining a structurally strong currency and financing the gap between domestic savings and investment. These inflows exert persistent downward pressure on the trade balance and often outweigh the intended effects of protectionism. As long as the world continues to channel its savings into US markets, the dollar will remain structurally overvalued and deficits will remain regardless of tariff policy.
The mirage of economic populism
People often rightly voice genuine grievances but then offer simplistic solutions that fail to address the root causes and often exacerbate the problem.
When competitiveness problems arise from macroeconomic imbalances, trade barriers serve as a tourniquet and palliative at best, but they are not a panacea. They may slow the bleeding and ease the pain in some industries, but they won’t treat the underlying condition that produces it: a global system in which the U.S. exports ostensibly safe havens, absorbs world capital and struggles with a chronically strong currency.
Used strategically, surgically, and sparingly — and for strictly economic purposes — tariffs can create temporary breathing space, protect sectors vital to national security, and counter truly unfair trade practices.
Yet used as a great remedy, they often reframe the manifestations of imbalance – and its winners and losers – leaving the root causes untouched and deepening the underlying trade-offs.
Against this backdrop, the US president’s promise that tariffs would somehow miraculously restore industrial strength was more politically appealing than economic in substance and thus destined for disappointment, a classic case of boundless ambition running up against structural constraints.
Harmful economic consequences are further compounded by political consequences when tariffs are deployed for non-economic purposes, such as coercing foreign powers, a strategy Trump has shown a marked penchant for.
The paradox of dollar dominance
America’s monetary privilege still rests on extraordinary foundations: deep capital markets, unparalleled financial liquidity, and strong legal and institutional integrity, with no credible rival yet in sight. But the reserve-currency status is not self-perpetuating. Ultimately, it must be anchored in a productive economy and a durable political consensus at home.
The paradox of dollar dominance is that the global system amplifies America’s power abroad and quietly erodes its foundations at home. As profits flow into global finance while costs fall on tradable industries and local communities, the political backlash will intensify.
Ultimately, the biggest threat to dollar hegemony arises not from an external challenger but from a growing political upheaval at home. Empires rarely lose their currency first; Before that, they lose the domestic consensus that sustains them — and makes their currencies credible.
(Part 7 of the series on the global dollar. Continued. Previous columns in the series:
