The Crown No One Want: The Invisible Cost of Global Reserve Currencies

Original text: No One Wants to be the Reserve Currency

Author: Zeus

Compiled by: Block unicorn

Preface

For decades, economists and policy makers have described the dollar's global dominance as the "overprivileges" of the United States - a jewel of power in the U.S. crown, giving the United States an unparalleled economic advantage on the world stage. We have heard that other countries are also eyeing this position, conspiring to overthrow the dollar and seize its privileged position.

However, reality tells a different story. The truth is far more complicated than intuition: while part of the U.S. economy—especially financial institutions and capital markets—benefits greatly from the status of reserve currency, these benefits are highly concentrated, while costs are widely distributed across the country. This structural imbalance makes the reserve currency role inherently unsustainable in the long run, regardless of the holder. What seems to be privileged, upon closer examination, reveals to be a gilded cage—the advantages it brings are accompanied by serious structural costs.

The hidden burden of reserve status

The fundamental problem of reserve currency status is reflected in what economists call the "Triffen dilemma", named after Belgian economist Robert Triffen, who proposed the concept in the 1960s. At its core is an irreconcilable conflict: in order to provide the world with enough dollars for international trade and reserves, the United States must continue to operate a trade deficit, essentially by exporting dollars in exchange for goods.

Although these deficits are crucial to global currency stability, they have gradually eroded the manufacturing, job markets in the United States and the economic foundation that made the dollar initially attractive. The issuer of reserve currency is trapped in a contradiction between domestic and international priorities, which cannot be resolved permanently and can only be managed at increasing costs.

The most obvious consequence is the drastic hollowing out of American manufacturing. The United States has experienced a profound industrial transformation since the US dollar became an undisputed reserve currency after the collapse of the Bretton Woods system in 1971. The proportion of manufacturing in GDP fell from about 25% in the 1960s to less than 12% today. The entire area that once dedicated to production has become hollowed out, forming the infamous "rust zone" and has brought about profound social unrest with this transformation.

What is little known is that this transformation is not a policy failure, but an inevitable structural consequence of the global role of the US dollar. When a country's currency becomes the world's major reserve asset, the country must mathematically consume more than production and imports more than exports. As a result, slowly deindustrialization is under the guise of consumer prosperity.

Considerations of major exporting countries

It is generally believed that export powers like Germany, Japan and China will eagerly seize reserve currency status if they have the opportunity. Their economic strategy is centered on export-driven growth and has accumulated huge trade surpluses and foreign exchange reserves. Of course they want their own currencies to occupy the privileged position of the US dollar, right?

However, these countries have always shown a strange hesitation to promote their currency as a true alternative to the US dollar. Even if China talks about the internationalization of the RMB, its actual policies are still cautious and have limited scope.

This hesitation is not accidental – it reflects a clear understanding of the costs associated. For export-oriented economies, reserve currency status will have a devastating blow to the economy. Increased demand for its currency will drive up its value, making exports more expensive and imports cheaper. The resulting trade deficit will undermine the export-driven model that drives its economic development.

Japan’s experience in the 1980s provides a warning. As the yen began to internationalize and appreciate, Japanese policymakers were concerned about the impact of its export sector. The 1985 Square Agreement led to a significant appreciation of the yen, which eventually ended Japan's economic miracle and started its "lost thirty years". China, which closely monitors this history, naturally does not want to repeat the same mistakes.

For these countries, the current arrangements offer better options: They can maintain undervalued currencies to boost exports while reinvesting the dollar surplus in U.S. Treasury bonds, in fact lending funds to Americans to buy their products. This dollar recycles them to maintain their export advantages while funding U.S. consumption that drives its economic growth.

At the same time, they are exempt from the burden of providing global liquidity, managing international financial crises, or struggling with the contradiction between domestic demand and international responsibility. They enjoy the benefits of the dollar system without bearing its costs.

Growing hesitation in the United States

Perhaps the evidence that the reserve currency status is not as generous as it portrays comes from the United States itself. More and more U.S. policymakers, from various political factions, question whether “overprivileges” are worth their domestic costs.

The Trump administration has made this shift clear. Trump's tariff policy was re-introduced with greater strength during his second term, directly challenging the mechanism to maintain the hegemony of the dollar. By imposing a broad 10% tariff on all imported goods (higher tax rates apply to specific countries), the Trump administration is actually showing that the United States is no longer willing to sacrifice its industrial base for its reserve currency status.

When Trump declared that “tariffs are the most beautiful word in the dictionary,” he marked a profound shift in U.S. priorities. Its goal is to reduce the trade deficit, even at the expense of undermining the mechanisms that maintain the dominance of the dollar.

This is not just Trump's abnormal move. Trade skepticism has become increasingly bipartisan consensus, with well-known figures from all political factions questioning the orthodox concept of free trade and its impact on American workers. For decades, maintaining the hegemony of the US dollar can prove that deindustrialization in the United States is justified, and this consensus is shaking in the hearts of the two factions.

Asymmetrical benefits

To understand why the current system still exists when no one wants to take the core position, we must recognize the asymmetric benefits it creates for different actors.

For emerging economies, the dollar system provides a mature development path. By maintaining an undervalued currency and focusing on exports, countries from South Korea to Vietnam have promoted their industrial development. Manufacturing employment laid the foundation for the growing middle class, while technology transfer accelerated modernization. These countries are willing to accept the dollar-dominated as the cost of entry for this development model.

For financial centers such as Switzerland, Singapore and the United Kingdom, the dollar system creates rich opportunities without the full burden of reserve currency status. They can participate in the global dollar market, provide financial services for dollar flows, and capture huge value without suffering from the manufacturing recession faced by major reserve currency issuing countries.

At the same time, for the United States, the cost is partially masked by the benefits of consumers. Americans enjoy low prices, convenient credit and lower interest rates than otherwise. The New York-centric financial sector captures immense value by managing global dollar flows. These obvious benefits historically outweigh the less obvious but far-reaching cost of industrial hollowing out.

Inevitable transitions

History tells us that no reserve currency can last forever. From the Portuguese real to the Dutch guild to the pound, every global currency eventually gives way to the erosion that underpins its economic base. The current dilemma of the US dollar shows that this historical pattern continues.

What’s unique about our current moment is that no country seems to be eager to take over this burden. China, the most commonly mentioned potential successor, showed significant hesitation about the comprehensive internationalization of the RMB. The euro project in Europe remains incomplete in the absence of a fiscal alliance. Japan and the United Kingdom lack the necessary economic scale.

This collective hesitation creates an unprecedented situation: the main reserve currencies show signs of exiting their role, but there is no obvious replacement ready.

Trump's radical tariff policies may accelerate the transition. By prioritizing domestic industries over international financial arrangements, the government is actually showing that the United States will no longer accept the structural trade deficit required as a reserve currency issuer. However, without these deficits, the world could face a dollar shortage, which could severely limit global trade and finance.

Find a new balance

If the current reserve currency arrangement has become unsustainable, what happens next? More importantly, how confusing will this transition be?

We should admit that the transition from one global monetary order to another is often historically chaotic, often accompanied by financial crises, political turmoil, and sometimes war. The transition from pound to dollar was not planned or ordered – it emerged amid the chaos of the two world wars and the Great Depression. We should expect that any future transition will not be less than this turmoil unless we consciously design to achieve stability.

The most commonly discussed alternative is a multipolar monetary system in which several major currencies share reserve status. This will distribute benefits and burdens to multiple economies, potentially easing pressure on any country to maintain excessive deficits.

However, multipolar systems will bring their own challenges. Liquidity diversification increases transaction costs and complicates crisis response. Coordination issues between competitive monetary authorities will intensify during financial pressures. Most importantly, this approach simply shifts Triffen’s dilemma to multiple shoulders, rather than addressing the fundamental contradictions at its core.

Principles of ideal alternatives

Rather than focusing on specific implementation plans, let us think about what principles should be followed for an ideal reserve system and its transformation - this system can solve the core paradox: the cost brought by the reserve currency status is something that no country wants to bear.

1. Collective governance rather than unilateral control

The fundamental problem with national currencies as reserve assets is the inevitable conflict between domestic demand and international responsibility. An ideal system would separate these functions while allowing the state to continue as stakeholders in system governance.

This does not mean that the country will become powerless—quite the contrary. They will gain more meaningful collective influence in systems that directly serve common interests rather than being subject to domestic political pressures in a single country. Neutrality does not mean giving up state participation; it means changing the way it participates.

2. Principle supply management

The current system actually contains a key feature worth retaining: the ability to expand the stock of money and export to meet global demand. This expansion capability is crucial to the operation of the global economy. The question is not about the expansion itself, but about who will bear the cost of the expansion and how to manage it.

An ideal system will retain this expansion capability while increasing what the current system lacks: symmetric contraction at the right time. This balanced approach will preserve the advantages of today’s systems while addressing its structural weaknesses.

This is not about inventing a completely new mechanism, but about implementing principles that have been understood for decades but have not been implemented due to political restrictions.

3. Absorbing transition rather than substitution

Perhaps the most important principle is that any viable alternative must absorb rather than attack the current system. The approximately $36 trillion in U.S. Treasury bonds held by entities cannot be simply abandoned, otherwise it will cause catastrophic damage to the global economy.

The ideal system will create continuous demand for these assets during the transition period, allowing for gradual evolution rather than destructive revolution. This is not to harm the interests of any country, but to ensure continuity in the evolution of the system.

The current reserve currency issuing countries (USA) will actually benefit from this approach—a ability to rebalance its economy to production without causing a collapse in debt markets that harm the interests of everyone.

4. Crisis resilience design

Financial crises are inevitable. What is important is how the system responds to these crises. Current arrangements rely heavily on discretionary interventions from central banks (especially the Federal Reserve), and political considerations often affect the timing and scale of interventions.

The ideal alternative will be incorporated into predetermined, transparent mechanisms to stabilize the market during stress periods—providing emergency liquidity, preventing panic ripple effects, and ensuring that key markets operate properly even when personal gain may drive disruptive behavior.

Importantly, this approach does not eliminate discretionary crisis responses at the national level. Sovereign currencies will retain their complete crisis management toolkit—central banks can still conduct emergency operations, implement unconventional monetary policies, or respond to domestic financial pressures as needed. The difference is that the international reserves will operate in a more predictable, rule-based mechanism, reducing their dependence on single-national decisions to maintain global stability. This creates a complementary two-layer system: predictable international coordination and flexible national responses coexist, each performing its own duties.

5. The appreciation trajectory under management

It is worth noting that a stable but controllable appreciation reserve asset brings certain benefits to the entire system. It will create natural incentives for central banks to gradually increase holdings while still allowing an export-driven economy to function properly. As these export economies have managed their currencies relative to the US dollar, they can continue to take this approach with new reserve assets.

The road to transition

The most dangerous period in currency evolution is the transitional stage. Here, designing for stability is crucial. The transition may go through several different stages:

Initial adoption: Starting with complementary coexistence rather than replacement, the new system will build credibility while minimizing interference.

Reserve Diversification: Institutions, especially central banks, will gradually incorporate new assets into their reserves, thereby reducing US dollar concentration without causing market panic.

Development of settlement function: With the increase in liquidity and adoption rate, the system can increasingly serve the settlement function of international trade.

Mature equilibrium: Finally a new balance will emerge, and national currencies will maintain their domestic functions, while international functions will turn to a more neutral system.

In this process, the US dollar will remain important—just gradually get rid of the unbearable weight of serving both domestic and international needs. This represents evolution, not revolution.

Transitional Challenge

No matter how well designed the theoretical alternatives, the transition from the current dollar-centric system faces great challenges. The US dollar is deeply rooted in global trade, financial markets and central bank reserves. Sudden changes may trigger currency crises, debt defaults and market failures, and have devastating consequences for humanity.

Responsible transitions require building bridges between systems, not destroying them. Those revolutionary approaches that advocate the collapse of the dollar may just cause economic disasters that the monetary system should have avoided. Despite how flawed the current system is, billions of people still rely on its continuous operation, even as alternatives develop.

The most feasible path forward is gradual evolution, not sudden revolution. The new system must prove its strengths through practicality rather than ideology, and be adopted through positive incentives rather than mandatory interference.

Prosperity considerations

The ultimate measure of any monetary system is not the purity of its ideology, but its actual impact on human prosperity. The asymmetric benefits and burdens created by current reserve currency arrangements are increasingly unsustainable. A well-designed alternative may create a more balanced prosperity by:

• Allow the United States to rebalance production without triggering a currency crisis

• Provide a more predictable monetary environment for exporting countries and avoid political complications

• Protect emerging markets from collateral damage to policies designed for other economies

• Reduce geopolitical tensions caused by financial weaponization

The problem of prosperity ultimately lies in balancing stability, adaptability and fairness—creating a system that provides sufficient predictability for long-term planning, while coping with changing environments and distributing benefits more equitably than the current system.

Conclusion: A burden that no country can bear alone

The truth about the status of reserve currencies contains important nuances. Not really no one wants it—some parts of the financial sector will undoubtedly benefit from it and support it because of it. Rather, benefits are centralized, while costs are distributed in a wider economy. This inherent structural imbalance makes it impossible for any country to sustain it for a long time.

Trump’s policies suggest that the United States may no longer be willing to accept these diversified costs to maintain this global role. However, the system has been continued because despite its flaws, everyone relies on someone to perform these functions.

The irony of history is that the United States itself may be the country that ultimately escapes the burden of reserve currency status after other countries have been accused of "manipulating" their own currencies for decades to escape the role of the dollar. This brings both dangers and opportunities—the dangers of disorderly transformation and the opportunity to design a fundamentally better system.

The challenges we face are not only technical, but also philosophical—redesigning the foundations of global finance to serve human prosperity rather than national interests. If we succeed, we may finally solve the paradox: no single country can continue to provide basic global monetary functions.