"Which means that it’s fully backed by full trust in our country — and more accurately, the strength of our military."
This is one thing that's not fully explained here in the article - how does our military exactly support our currency? The relationship certainly doesn't seem direct
I’d say that initially after ww2 with the bretton woods agreeemnent in 1944, yes, the US dollar’s reserve currency status was dependent on our military strength (specifically winning ww2).
Now its complicated. im biased but i think we have the strongest military in the world. and yet, de-dollarization is still happening.
needless to say, i need to think through this, and make updates. thanks for the feedback!
We got some pushback on Boyd's 14 ground truths piece on this point as well. Here was part of my reply to the pushback:
The structural fact is that US security guarantees, the alliance system, and the open trade order they sustain make dollar invoicing and dollar reserves the rational default for allies. And the empirics on this are sharper than we let on in the piece.
Eichengreen et al's "Mars or Mercury?" (2019) finds that military alliances raise a currency's reserve share in an ally's holdings by about 30% controlling for size, credibility, and trade depth. The Fed's own IFDP work finds that roughly 3/4ths of foreign government holdings of safe US assets are by countries with some military tie to the US. During COVID, US military allies were nearly 50% more likely to get a Fed swap line than non-allies — dollar liquidity itself is rationed along security lines. The 2022 Russia case made it operational in real time, crossing the security line cost Russia its dollar holdings.
Ken Rogoff also puts it crisply in his recent book: "the dollar and the military are inseparably linked — military power underpins trust in the currency, while the dollar's privileges make it easier to finance that power."
Any discussion of savings rate, especially regarding this K-shaped economy is not useful without discussing rate of participation in savings.
Also, Cato Institute's libertarian throw-it-all-out position contrasts sharply with Spain's savings rate; Spain, a socialist nation that provides universal health care and private medical insurance should you want it. Maybe we should be more like our European neighbors, indeed.
And of course, any discussion of health care costs to government is incomplete without even a mention of its for-profit structure in the U.S.
Great piece, Grant. Your historical framework on global reserve currencies and Wagner’s Law gives critical context to the spending side of the equation. However, I think there is a crucial second half to the debt equation that wasn't mentioned: the revenue side, specifically federal tax policy. Since the 1980s, top marginal income tax rates have fallen significantly—from 70% down to 37% today—along with repeated legislative cuts to corporate and capital gains tax rates. While spending on social safety nets and mandatory programs has grown, federal tax receipts as a percentage of GDP have fallen. Persistent structural deficits are a function of both what we spend and what we collect. Do you see tax policy reform or adjusting revenue baselines playing a realistic role alongside entitlement changes in stabilizing our debt-to-GDP ratio, or do you view spending cuts as the only viable mechanism?
Fantastic piece. Made me think. Really liked the section about trust in America and how interconnected our economic system is to all other systems.
Another angle I’d be curious to explore is how trust across many levels is down and potentially making problems like this worse. For example- peoples trust in government, financial institutions, the media, their neighbors, and perhaps even our own future can’t be good news for trying to foster stability and prosperity going forward.
Thanks for reading! Your point on trust is a good call out.
Pew Research finds that trust in U.S. institutions is at all time low since 1960.
Obviously, that's not directly related to trust in the U.S.'s military strength, US Dollar, or anything else.
But it speaks to the fact that if the US Dollar were to lose strength, it'd be a slow reversal, rather than a single shock. And is part of the severity of the federal deficit + why the US Govt is hiring ex-Wall Street Bankers
I think the end of section IV and your conclusion in section V nicely sum up the most sensible stance: we cannot eliminate the social safety net completely, we must encourage education, responsibility, and accountability, and great men and women of high agency must lead us into the future if we are to preserve the the American way of life for the next generation.
If social benefits were rolled back, what would be the recourse for those who have paid in but may not see the benefits?
Feels like a really difficult challenge to deal with because once folks start collecting these benefits, they aren’t going to want to see them go away.
As Gen Z / Gen Alpha’s, we’ve enjoyed the tax free retirement accounts to their fullest (Roth Ira 1997 & HSA 2003).
The oldest Gen Z is only 29 (still 6 years short of the minimum to be US President of 35).
Even if we were in power, we’d still wanna design public policy under John Rawl’s veil of ignorance - basically not knowing what situation we’d born into, so probably best not to pull social benefits right away.
There’s power in signaling. Perhaps by the Social Security Administraion signaling the possibility of tapering off benefits, we can see how that impacts savings rate data among the older (and younger) generations, then make decision from there
i do think that when we’re older, we’ll have to have aggressively reformed social benefits - just not sure how yet, but that’s why we’re discussing :)
"Which means that it’s fully backed by full trust in our country — and more accurately, the strength of our military."
This is one thing that's not fully explained here in the article - how does our military exactly support our currency? The relationship certainly doesn't seem direct
👀 fantastic call out.
I’d say that initially after ww2 with the bretton woods agreeemnent in 1944, yes, the US dollar’s reserve currency status was dependent on our military strength (specifically winning ww2).
Now its complicated. im biased but i think we have the strongest military in the world. and yet, de-dollarization is still happening.
needless to say, i need to think through this, and make updates. thanks for the feedback!
We got some pushback on Boyd's 14 ground truths piece on this point as well. Here was part of my reply to the pushback:
The structural fact is that US security guarantees, the alliance system, and the open trade order they sustain make dollar invoicing and dollar reserves the rational default for allies. And the empirics on this are sharper than we let on in the piece.
Eichengreen et al's "Mars or Mercury?" (2019) finds that military alliances raise a currency's reserve share in an ally's holdings by about 30% controlling for size, credibility, and trade depth. The Fed's own IFDP work finds that roughly 3/4ths of foreign government holdings of safe US assets are by countries with some military tie to the US. During COVID, US military allies were nearly 50% more likely to get a Fed swap line than non-allies — dollar liquidity itself is rationed along security lines. The 2022 Russia case made it operational in real time, crossing the security line cost Russia its dollar holdings.
Ken Rogoff also puts it crisply in his recent book: "the dollar and the military are inseparably linked — military power underpins trust in the currency, while the dollar's privileges make it easier to finance that power."
Any discussion of savings rate, especially regarding this K-shaped economy is not useful without discussing rate of participation in savings.
Also, Cato Institute's libertarian throw-it-all-out position contrasts sharply with Spain's savings rate; Spain, a socialist nation that provides universal health care and private medical insurance should you want it. Maybe we should be more like our European neighbors, indeed.
And of course, any discussion of health care costs to government is incomplete without even a mention of its for-profit structure in the U.S.
All really great points Dred.
Didn’t address it here in depth, but America’s for-profit healthcare structure is on my wish list of things to study.
Appreciate you challenging my beliefs b/c it’s making me think more critically.
Great piece, Grant. Your historical framework on global reserve currencies and Wagner’s Law gives critical context to the spending side of the equation. However, I think there is a crucial second half to the debt equation that wasn't mentioned: the revenue side, specifically federal tax policy. Since the 1980s, top marginal income tax rates have fallen significantly—from 70% down to 37% today—along with repeated legislative cuts to corporate and capital gains tax rates. While spending on social safety nets and mandatory programs has grown, federal tax receipts as a percentage of GDP have fallen. Persistent structural deficits are a function of both what we spend and what we collect. Do you see tax policy reform or adjusting revenue baselines playing a realistic role alongside entitlement changes in stabilizing our debt-to-GDP ratio, or do you view spending cuts as the only viable mechanism?
Hi Gary, really appreciate the thoughtful comment.
Without putting too much thought into it, my gut says the spending problem should be the bulk of our concern.
America has the highest GDP of any country by far. Sure, some of our tech companies have more revenue than many countries.
But history has shown that the transition to a welfare states puts your position in the global pecking order at risk.
Fantastic piece. Made me think. Really liked the section about trust in America and how interconnected our economic system is to all other systems.
Another angle I’d be curious to explore is how trust across many levels is down and potentially making problems like this worse. For example- peoples trust in government, financial institutions, the media, their neighbors, and perhaps even our own future can’t be good news for trying to foster stability and prosperity going forward.
Thanks for reading! Your point on trust is a good call out.
Pew Research finds that trust in U.S. institutions is at all time low since 1960.
Obviously, that's not directly related to trust in the U.S.'s military strength, US Dollar, or anything else.
But it speaks to the fact that if the US Dollar were to lose strength, it'd be a slow reversal, rather than a single shock. And is part of the severity of the federal deficit + why the US Govt is hiring ex-Wall Street Bankers
https://www.wsj.com/politics/national-security/pentagon-dangles-400-000-salaries-to-recruit-wall-street-bankers-944435dc?eafs_enabled=false
Well written—I enjoyed your essay.
I think the end of section IV and your conclusion in section V nicely sum up the most sensible stance: we cannot eliminate the social safety net completely, we must encourage education, responsibility, and accountability, and great men and women of high agency must lead us into the future if we are to preserve the the American way of life for the next generation.
Thanks Matt!
If social benefits were rolled back, what would be the recourse for those who have paid in but may not see the benefits?
Feels like a really difficult challenge to deal with because once folks start collecting these benefits, they aren’t going to want to see them go away.
As Gen Z / Gen Alpha’s, we’ve enjoyed the tax free retirement accounts to their fullest (Roth Ira 1997 & HSA 2003).
The oldest Gen Z is only 29 (still 6 years short of the minimum to be US President of 35).
Even if we were in power, we’d still wanna design public policy under John Rawl’s veil of ignorance - basically not knowing what situation we’d born into, so probably best not to pull social benefits right away.
There’s power in signaling. Perhaps by the Social Security Administraion signaling the possibility of tapering off benefits, we can see how that impacts savings rate data among the older (and younger) generations, then make decision from there
i do think that when we’re older, we’ll have to have aggressively reformed social benefits - just not sure how yet, but that’s why we’re discussing :)