The Slow Unraveling
How History, Debt, and Distrust Are Reshaping the Dollar’s Role in the World
This article takes 10 minutes to read, and is a departure of what I normally do. I’m having more fun focusing on topics, so I’ll probably do more of these going forward.
Key takeaways
The U.S. dollar’s reserve status is built on more than economic size, it rests on global trust. That trust is being eroded by surging debt, unsustainable interest costs, and political dysfunction. Reserve currencies don’t collapse when they run out of money, they collapse when the world loses confidence in how they use it.
Historical transitions show that monetary supremacy fades slowly and unevenly. From Britain to the Dutch Republic, the pattern is clear: persistent deficits, military strain, and diminished credibility degrade reserve currencies over time. The U.S. is showing signs of that same structural decay.
Military power is an underappreciated foundation of financial dominance. America’s global reach secures trade, deters conflict, and stabilizes markets, giving the dollar a unique “security premium.” But that premium depends on sustained deterrence, strategic clarity, and institutional strength, all of which are under pressure.
Monetary fragmentation is already underway, reflected in both policy and technology. Nations are experimenting with yuan-settled trade, digital currencies, and stablecoins, not as ideological rebellions, but as rational responses to a more uncertain U.S. fiscal trajectory and the weaponization of finance.
For investors, the shift doesn’t end global markets, it redistributes opportunity. The real winners won’t be those who guess the next reserve currency, but those who own the productive infrastructure of the future: energy, semiconductors, water systems, defense, and supply chain logistics.
The path forward isn’t about fear, it’s about positioning. In a world where trust disperses, value concentrates in what the world needs most. Investors should prioritize usefulness over allegiance, and durability over convention. Currency regimes may rotate, but productive assets endure.
The world reserve structure today
The dollar’s supremacy has long been treated as an inevitability. But inevitabilities have a way of becoming assumptions, and assumptions are dangerous in markets. With U.S. debt surpassing $36 trillion, and annual interest payments now exceeding $1 trillion, the foundation that supports the dollar is beginning to creak. This isn’t just about numbers, it’s about the global perception of U.S. credibility. Reserve currency status isn’t earned once and kept forever; it’s sustained through trust, discipline, and global confidence in your ability to manage power responsibly. And history shows what happens when that confidence slips.
The most immediate crack in that foundation of trust is fiscal: a debt burden growing too fast for even the world’s deepest markets to ignore. When a nation must borrow more just to service the interest on its existing debt, it enters what economists call a fiscal death spiral, a feedback loop where rising debt begets rising interest costs, which then require even more borrowing. This dynamic is exceptionally difficult to reverse without either significant austerity or sustained inflation. America’s national debt has now surpassed $36 trillion, with another $3–5 trillion likely on the way if proposed tax cuts are extended. Interest payments alone have topped $1 trillion per year, now exceeding even the U.S. defense budget. Investors are beginning to take notice. Moody’s has stripped the U.S. of its final AAA rating, Treasury auctions are showing signs of strain, and JPMorgan’s Jamie Dimon recently warned: “You are going to see a crack in the bond market. It is going to happen”.
To understand what might come next, it helps to look backward. The U.S. isn’t the first global power to face doubts about the sustainability of its economic model or the dominance of its currency. From Spain’s silver-fueled empire to France’s post-Napoleonic decline, history is full of examples where financial overreach, political turmoil, or shifting power dynamics led once-mighty currencies to lose their global standing. These stories don’t just belong to the past, they offer a mirror for the present.
Historical Parallels: Lessons from the Pound
Reserve currencies don’t collapse overnight, they erode slowly, often in tandem with rising debt, institutional strain, and shifting global power. Britain’s experience is instructive. In the 19th century, the pound sterling dominated global trade, anchored by the City of London’s financial reach and the gold standard’s credibility. But two world wars, mounting debt, and the rise of the U.S. industrial base slowly unraveled that dominance.
By the mid-20th century, confidence had shifted. The dollar, backed by America’s gold reserves and expanding military presence, overtook the pound, not through revolution, but through realignment. Britain’s decline offers a warning: reserve status isn’t a birthright. It’s maintained through global trust, institutional coherence, and economic scale, all of which can fray long before the consequences become visible.
Britain’s monetary unraveling also revealed a subtler truth: reserve currency decline isn’t always triggered by a singular event, it’s a slow leak of credibility across many fronts. Investors didn’t abandon the pound in one moment; they gradually reweighted exposure as Britain’s relative advantages faded. Inflation crept in. Sterling devaluations multiplied. Fiscal and trade imbalances worsened. Each erosion chipped away at confidence until the pound could no longer serve as the unquestioned store of value it once was. The U.S. today risks a similar trajectory, not because a superior alternative has emerged, but because persistent deficits, polarized politics, and unsustainable interest burdens are degrading the trust that once made the dollar feel rock solid. The lesson isn’t that dominance disappears overnight, it’s that trust, once diluted, is difficult to restore.
But America’s rise wasn’t built on economics alone. What truly set the U.S. apart, and what continues to anchor the dollar today, is its unmatched capacity to project power.
The connection between the military and the strength of the US Dollar
The U.S. dollar’s global dominance is often attributed to America’s vast economy, deep capital markets, and political stability. But those factors, while necessary, are not sufficient. The dollar’s strength is also underwritten by something more forceful: American military power. The U.S. doesn’t merely participate in global trade, it safeguards it. From the Strait of Hormuz to the South China Sea, American naval and aerial presence ensures the security of shipping routes, deters regional aggression, and upholds a global order in which commerce can flow. This gives the dollar a kind of “security premium”, a structural edge grounded in the assurance that the U.S. will enforce the rules if needed.
That military-backed order translates into financial privilege. It allows the U.S. to borrow in its own currency at low rates, to export inflation without triggering capital flight, and to sustain deficits that would be unsustainable for almost any other country. When financial stress hits, global investors still instinctively rush into Treasurys. That reflex isn’t just psychological, it’s rational. It reflects deep confidence that the U.S. will remain the stabilizing anchor in a volatile world, backed not only by institutions but by overwhelming force.
But cracks are beginning to show. One signal comes from the bond market itself. Normally, market selloffs trigger a flight to safety, sending Treasury yields lower. Lately, though, we’ve seen instances where Treasurys sold off alongside equities, a break from historical patterns. This was especially evident during recent tariff escalations, when markets panicked and bonds failed to provide their usual ballast. For some investors, this raised an unsettling question: What happens when the dollar is no longer seen as the unshakable safe haven? When both the financial and military guarantees behind it begin to feel less absolute?
This is why calls to drastically reduce military spending can carry unintended economic consequences. America’s defense commitments don’t just serve strategic goals; they underpin the credibility of the dollar itself. If the U.S. were to retreat significantly from its global security role, it would weaken the perception that the dollar is backed by the enforcement power necessary to maintain global order. In a world where confidence is currency, any signal that the U.S. might no longer underwrite stability could accelerate the search for alternatives.
And that’s where the real risk lies. The slow, internal erosion of trust, not sudden collapse, but steady decay, is what ultimately undermines monetary dominance.
Plausible ways the strength of the US dollar could fade away
Dollar dominance is unlikely to end with a bang, it frays quietly, through institutional decay and rising doubt. The dollar’s strength rests not just on economic output or military might, but on global faith in America’s governance. Repeated debt-ceiling standoffs, runaway deficits, and political gridlock don’t cause collapse, but they do plant doubt. And doubt is how reserve currencies unravel.
The yuan stands as the only politically viable alternative to the dollar, but even then, it’s a deeply flawed contender. China is actively promoting yuan-based trade, forging bilateral settlement agreements, and investing in digital currency infrastructure designed to bypass SWIFT. These moves are not just symbolic; they’re strategic, aimed at insulating China and its partners from U.S. financial leverage. In theory, if Beijing eased capital controls, improved legal transparency, and allowed for more independent institutions, the yuan could attract broader international use, especially among emerging markets already within China’s trade sphere. But that “if” remains enormous. The yuan is still tightly managed, the rule of law is subordinate to political aims, and foreign asset rights remain uncertain. For many global investors, these structural deficiencies make the yuan less a solution and more a hedge of last resort. China may be the only plausible alternative from a geopolitical standpoint—but it’s a reluctant fallback, not a clear successor.
Geopolitical shocks could nonetheless catalyze a shift. A major conflict in Taiwan or the Middle East, for example, could weaken faith in the dollar, not by default, but by breaking the illusion of unshakable U.S. stewardship. In times of stress, nations may fast-track alternative settlement systems, treat dollar-based sanctions as financial coercion, and reconfigure trade to limit exposure to U.S. oversight. In that world, trust doesn’t just erode, it fragments. And once fragmented, reserve currency status is rarely reclaimed on the same terms.
This fracture isn’t just theoretical, it’s already materializing, not only in policy but in code.
Cracks in the Monetary Foundation
The erosion of trust in the dollar isn’t just showing up in bond markets, it’s showing up in the design of new systems. Around the world, central banks are developing digital currencies, and institutions are turning to stablecoins: programmable, instantly settled tokens that bypass traditional channels. These tools aren’t driving fragmentation, they’re responding to it. When faith in governments falters, people look for systems they can verify, not just trust.
Stablecoins bypass SWIFT, settle in minutes, and run 24/7, offering a preview of a future built on distributed rails instead of legacy infrastructure. Their rise reflects growing unease with fiscal recklessness, sanctions overreach, and the fragility of existing systems. They’re not replacing the dollar, but they are hedging against its vulnerabilities.
For investors, this is a signal, not a crisis. Trust is dispersing, not disappearing. In a fractured system, resilience won’t come from picking the next dominant currency, it will come from owning the productive assets that endure no matter what: real cash flows, real solutions, and real economic value.
Investor Positioning in a Fractured World
The erosion of dollar dominance isn’t the end of markets, it’s the start of a realignment. And realignments reward those who position early.
The strategy isn’t to predict the next reserve currency. It’s to invest in what outlasts currency regimes altogether: productive, irreplaceable assets tied to the physical world. Own companies at the heart of global necessities, semiconductors, energy logistics, defense systems, clean water, rare minerals, and digital infrastructure. Favor geographies with fiscal restraint, legal transparency, and demographic resilience. Underweight assets dependent on artificially low rates, government credibility, or U.S. investor flows to sustain valuations.
As the dollar's centrality in global finance recedes, capital allocation will increasingly favor assets with intrinsic productivity and pricing power, particularly those insulated from U.S.-centric capital flows and interest rate policy. Companies tied to physical infrastructure, energy, semiconductors, water systems, and logistics, tend to benefit from inelastic demand, localization of supply chains, and fiscal stimulus tied to national security and reshoring. These sectors often possess high operating leverage, meaning earnings can scale faster than revenues in inflationary or realignment environments. Moreover, real assets tend to reprice upward as fiat trust wanes, serving both as inflation hedges and as new collateral for emerging financial systems. As capital flows fragment across multiple currency blocs, firms with multi-market exposure, pricing power, and tangible output will be better positioned to capture a disproportionate share of global earnings. In other words, the more fractured the system becomes, the more premium accrues to utility, necessity, and productive capacity, not to abstract growth narratives or leverage-fueled valuations.
This isn’t a call for panic, it’s a call for clarity. When the trust underpinning monetary systems disperses, usefulness prevails. In a fractured world, your portfolio shouldn’t bet on which flag flies over the reserve, it should bet on what the world cannot live without.