J.D. Vance is taking heat for questioning whether the strong dollar is actually good for America. One critic went after Vance for “explicitly arguing to make America poorer.”
There’s a grain of truth there. Losing the strong dollar reserve-currency status would make Americans poorer—potentially much poorer. But that’s only half the story.
Because reserve-currency status handed America an extraordinary windfall that Washington, the Federal Reserve, and Wall Street siphoned off. Leaving regular workers to pay the bill for an overpriced currency that exported our manufacturing base.
What is Reserve Currency Status
So, first, what is reserve currency status. The idea is that your currency is so strong or dominant that the entire world has to use it to underpin their own currency. This has been the US dollar since the British torpedoed the pound after the Great Wars.
The upside is you can print pallets of green paper and trade it for toasters and semiconductors. The downside is it also makes your currency more expensive.
The expensive currency is still a good deal if you’re pocketing free toasters. But the problem is the Fed takes that freebie and inflates it away with low rates, which benefit corporations, rich borrowers, Wall Street who gets a cut on every loan, and the biggest borrower on earth, the Federal government.
When the smoke clears, regular Americans did not get the free toasters. But we did get the expensive currency that devastated the Rust Belt.
Worse, if you now end reserve currency status -- say, by running $2 trillion deficits in relative peacetime so the world loses faith in the dollar -- it means the dollar could collapse by double digits as foreigners dump their dollars.
This erodes the wealth of every dollar holder -- which is overwhelmingly the regular Americans who never got the free toasters in the first place.
That is the reserve-currency trap.
So gaining reserve currency status rewarded corporations, Wall Street, and the biggest borrower on earth, the Federal Government. But losing it hits regular Americans buying groceries, gasoline, medicine, clothing, electronics, and everything else tied to global markets.
So we got suckered. But the scam is obvious only when we lose it.
What Should Have Happened
The reserve-currency dividend could have been used to build the world’s most productive economy: infrastructure, energy, factories, research, capital equipment, and a government balance sheet strong enough to survive wars and recessions.
Instead, it financed federal consumption, financial engineering, trillion-dollar bailouts, and trillion-dollar deficits.
And it’s not just the strong dollar they squandered.
Chinese industrialization delivered cheap manufactured goods. The internet slashed the cost of information and coordination. Container shipping and global supply chains transformed the cost of moving goods. Automation made each worker dramatically more productive.
Yet none of these productivity miracles lowered prices. Because Washington spent every dividend.
Entrepreneurs keep performing miracles. The political class keeps converting those miracles into larger government, higher asset prices, and more debt.
The difference is that we’re not going to uninvent shipping containers. But we can certainly lose reserve-currency status.
What’s Next
Vance is correct that the strong dollar and global demand for American assets have subsidized imports, encouraged financialization, and weakened parts of the industrial base.
But his critics are also correct that deliberately weakening the dollar means deliberately reducing Americans’ wealth. A manufacturing revival, if it comes at all, would take years. The higher prices would arrive immediately.
The answer is not to throw away the privilege.
It is to stop squandering it. Cut the deficits. End the Fed’s serial bailouts. Stop using cheap foreign capital to finance government consumption. Make America the best place on earth to build factories, generate energy, invest capital, and hire workers.
Use reserve-currency status to rebuild the productive economy that supports it.
Vance is right to recognize that reserve-currency status has become a resource curse. But you do not cure a resource curse by destroying the resource.
You cure it by taking it away from the people who are wasting it.
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