Achilles’ deal: Dollar decline and US grand strategy after the crisis

Abstract

ABSTRACTTowards the end of 2012, the US budget deficit stayed above US$1 trillion for the fourth year in a row. In the absence of the dollar's international reserve currency status, foreigners’ willingness to purchase US debt would diminish sharply. ‘Declinists’ have argued that this Achilles’ heel of US power has become increasingly fragile, with the 2008 financial crisis further eroding US monetary privileges and bearing profound implications for international security and the distribution of power in the international system. However, contrary to these accounts, this paper shows that dollar hegemony not only remains strong, but that US monetary power has in fact increased. How do we explain this? In important areas, the US’ economic decline is nowhere near as pronounced as is commonly assumed. Also, its strategic power in economically important regions, particularly in East Asia, helps incentivize both allied and potential contender states into its broader monetary regimes. To the extent that a weakening of dollar hegemony forms a primary component of the declinist case, it is thus overstated. This ‘deal’ will not last forever, but rising powers continue to face strong incentives to remain within a US-centric order, even after the financial crisis of 2008.