The World Is Preparing for Life After the Dollar

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• The dollar’s power has always rested on trust, and that trust, Maurice Obstfeld warns, is starting to crack.
• As tariffs turn into fiscal tools and politics blur the Fed’s independence, the system built on U.S. credibility begins to fragment.
• Obstfeld’s message is clear: the greatest threat to the dollar’s dominance isn’t abroad; it’s coming from within.

The dollar’s power has always rested on more than money. It rests on trust: Trust that U.S. leaders act predictably, trust that institutions remain independent, and trust that rules apply equally to everyone.

Maurice Obstfeld, former Chief Economist of the IMF and one of the world’s most respected voices in international economics, argues that this trust is eroding. He warns that erosion could reshape the global financial order. Here’s how.

Tariffs as Fiscal Policy

Obstfeld calls tariffs “the illusion of a free lunch.” They are sold as tools to bring back jobs or punish foreign competitors, but in reality, they function as taxes on Americans. Importers pay them, consumers absorb them, and businesses suffer shrinking margins.

The newer wave of tariffs, he says, is even more dangerous because it doubles as fiscal policy. Tariff revenues are used to fund deficits, creating a dependency that masks deeper fiscal imbalances. Many believe it’s not sustainable.

When tariffs replace taxes, inflation and inefficiency follow. Worse, they invite retaliation and distrust, the opposite of what stable monetary systems require.

History offers plenty of warnings. Nixon’s 1971 import surcharge was sold as a short-term measure to protect the dollar after the gold window closed. Trump’s 2018 tariffs were billed as leverage to restore balance. Both lingered longer than planned, distorting prices and feeding inflationary pressure. Once governments grow accustomed to tariff revenue, they rarely give it up easily.

The Dollar Was Built on Credibility

Since World War II, the dollar has served as the foundation of global finance. Nearly 90 percent of currency trades involve it. Central banks hold the majority of reserves in it. The system works because the U.S. has been viewed as a reliable steward.

That perception is changing. Some believe coercive policies, such as using tariffs or defense guarantees as bargaining tools, blur the line between economics and politics. If countries begin to see dollar reliance as a vulnerability, they will hedge by shifting toward other currencies.

The outcome is not necessarily a collapse but rather a fragmentation: a world divided into dollar, euro, and yuan blocs. That world could be less efficient, more volatile, and more political.

In the decades after Bretton Woods, credibility meant restraint. The U.S. absorbed global capital because investors trusted that politics stopped at the Fed’s door and that contracts would be honored in any court. Even during the Cold War, foreign capital saw America as the safest harbor. That sense of reliability, of rules outlasting administrations, became the true reserve asset behind the dollar. When that perception weakens, the mechanics of trade and finance follow suit.

The Rise of Financial Nationalism

At home, the risks grow from within. Fiscal dominance, when monetary policy serves political spending instead of price stability, threatens to undo decades of credibility.

Obstfeld notes that new calls to reform the Fed are not about transparency or efficiency. They are about control. The agenda is simple: keep rates low to fund deficits cheaply. It is a short-term fix with long-term costs. If the Fed becomes an arm of the Treasury, inflation expectations will un-anchor. Real rates will rise and the very asset that anchors global finance, U.S. debt, could lose its aura of safety.

The trend is not confined to Washington. Japan’s yield-curve control has blurred fiscal and monetary aims. Europe debates rewriting debt rules to accommodate populist spending, and China’s capital controls tie its currency to political objectives. Each example reflects the same instinct: to use money as an instrument of power rather than a measure of value. The more nations weaponize policy, the less faith investors place in any one currency as neutral ground.

Stablecoins and the Next Front

Even new technologies carry risks of fragmentation. Dollar-based stablecoins, meant to strengthen U.S. influence, could instead spark backlash. If other nations fear their domestic payment systems are being colonized by lightly regulated dollar channels, they may respond with digital walls: separate systems, currencies, and controls.

We are already seeing the outlines of that world. The European Central Bank is piloting a digital euro meant to safeguard monetary sovereignty. China’s e-CNY aims to bypass Western payment rails entirely. Even in Africa, regional digital currencies are emerging to reduce dollar dependence in cross-border trade. Each is rational from a domestic view, and collectively they pull the world further from the unified plumbing that once underpinned globalisation.

Obstfeld calls it a “new source of fragmentation.” What begins as financial innovation could end as geopolitical isolation.

The Cost of Losing Trust

For investors, fragmentation means higher volatility, thinner liquidity, and reduced predictability. For the U.S., it means losing the privileges that come with issuing the world’s reserve currency: cheap borrowing, financial flexibility, and diplomatic leverage.

The dollar’s reserve role delivers what economists call an “exorbitant privilege.” Roughly seven trillion dollars of global reserves sit in U.S. assets, allowing America to borrow cheaply and run deficits others could never sustain. Lose that status, and borrowing costs rise. The Treasury market’s depth, a cornerstone of global finance, thins. That cascade would touch everything from mortgage rates to military spending.

The irony, Obstfeld suggests, is that the greatest threat to the dollar does not come from Beijing or Brussels. It comes from Washington itself, from policies that confuse short-term political gain with long-term economic stewardship.

Lessons from the Past

Obstfeld does not romanticize globalization or the Washington Consensus. But he reminds us why they worked: not because of ideology, but because of credibility. Economies thrived when markets trusted governments to be predictable, when independent institutions balanced power, and when cooperation outweighed coercion.

That trust is harder to maintain in a fragmented world. Yet history shows that monetary systems built on credibility survive longer than those built on fear. The postwar order endured not because it was perfect but because it was grounded in a shared belief that openness and discipline served the common good.

In moments of uncertainty, nations often reach for protectionism and control. But every episode of financial nationalism carries the same lesson: credibility lost is not easily regained. The inflationary spiral of the 1970s, the Latin American debt crises of the 1980s, and the Asian financial turmoil of the 1990s each underscored that stable systems require restraint, not dominance.

The Fork in the Road

Global finance stands at a fork in the road. One path leads to reform: fiscal discipline, institutional independence, and renewed cooperation. The other leads to fragmentation: rising barriers, multiple currency blocs, and shrinking trust.

The U.S. can still choose which path it takes. But as economists warn, the dollar’s dominance is only as strong as the world’s confidence in the system behind it.

Once fractured, trust rarely heals quickly. It took decades for Europe to rebuild faith in monetary stability after the hyperinflations of the twentieth century. It took centuries for gold to lose its grip on global trade. If the U.S. squanders the trust that underwrites the dollar, the world will not wait patiently for it to return. A new order will emerge, not necessarily stronger but different, and rebuilding credibility will demand more discipline, humility, and cooperation than any interest-rate move could achieve.

Once that confidence fades, it may never return in full.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up for our Newsletter or subscribe on your preferred podcast platform so that you don't miss out on future episodes.