Can the United States Sustain Its Financial Privilege Without Sustaining Its Global Leadership?

The Cost of Power

As American debt rises, the fiscal value of each basis point of the dollar's advantage grows. Whether Washington can reduce its global commitments without eroding that advantage is becoming a consequential economic question.

Few great powers in modern history have combined public borrowing on the scale of the contemporary United States with such persistent international demand for their liabilities. Federal debt held by the public now exceeds a full year of national output. Servicing that debt claims a growing share of federal resources. Washington's security commitments remain global in reach. Yet foreign investors continue to direct substantial capital towards American markets. The dollar remains the principal reserve and funding currency of the international financial system. Treasury securities perform functions that extend far beyond the financing of the federal government.

The coexistence of mounting obligations and durable foreign demand is not a contradiction. A sovereign that issues the world's dominant reserve currency and presides over its deepest capital market occupies a financial position unavailable to most borrowers. It does, however, raise a question that conventional discussions of American indebtedness rarely address. To what extent does the ability of the United States to finance itself on favourable terms depend upon the international order it constructed after 1945 and continues to sustain at considerable expense?

The question is not whether the dollar is about to be displaced. The available evidence offers little support for such a prediction. American financial privilege is better understood as an advantage expressed through prices than as a status that must either survive intact or disappear. Treasury securities provide liquidity and safety services for which investors accept lower returns than they would otherwise require. That discount can narrow without the dollar losing its dominant position. The principal vulnerability may therefore lie not in the disappearance of American monetary primacy but in the possibility that its benefits become progressively more expensive to preserve.

This distinction acquires significance as federal indebtedness grows. A modest increase in borrowing costs matters more when the stock of debt is exceptionally large. If geopolitical relationships contribute to the demand for American financial assets, changes in those relationships could eventually affect the fiscal capacity through which the United States exercises international power. The proposition is plausible. Establishing its economic importance requires separating the effects of geopolitical confidence from those of monetary policy, inflation, market liquidity, the growing supply of Treasury securities and the absence of credible alternatives.

The arithmetic of a privileged borrower

The Congressional Budget Office's February 2026 outlook provides the fiscal baseline. Under its projections federal debt held by the public rises from 101 per cent of GDP in 2026 to 120 per cent in 2036, surpassing the previous record of 106 per cent set in 1946. Over the same decade the federal deficit increases from 5.8 to 6.7 per cent of GDP. Net interest expenditure rises from 3.3 to 4.6 per cent. The CBO's extended projections place the debt ratio at 175 per cent by 2056, conditional upon the assumptions underlying its baseline.

The composition of the projected deterioration is revealing. The primary deficit, which excludes net interest, declines from 2.6 to 2.1 per cent of GDP over the decade. The increase in net interest therefore exceeds the entire projected increase in the overall deficit ratio. Past borrowing is acquiring greater influence over the resources available for future political decisions.

Monetary sovereignty changes the nature of the constraint without removing it. The United States borrows in its own currency. Its monetary and fiscal capacities distinguish it from sovereign borrowers dependent on foreign-currency financing. It nevertheless remains exposed to changes in the cost at which investors are willing to hold its liabilities. Debt sustainability depends on the relationship between effective borrowing costs, nominal growth and the primary fiscal balance, together with the political capacity to adjust taxation and expenditure.

The size of the debt stock magnifies the consequences of changes in financing conditions. When debt held by the public exceeds annual GDP, every basis point added to the effective interest rate eventually adds at least a basis point of GDP to annual interest outlays. The fiscal value of each basis point of favourable borrowing conditions therefore increases as indebtedness rises.

A CBO analysis published on 8 October 2026 makes the sensitivity concrete. The agency examined scenarios in which interest rates exceed those underlying its February baseline throughout the period from 2026 to 2036. With rates 50 basis points higher, cumulative deficits were $1.9 trillion larger than in the baseline. Debt held by the public reached 124.4 per cent of GDP in 2036 rather than 120.2 per cent. With rates 150 basis points higher, cumulative deficits were $6.0 trillion larger and the debt ratio reached 133.1 per cent. In both scenarios about five-sixths of the additional deficits reflect the direct effect of higher rates on baseline debt. The remaining sixth reflects the cost of servicing the additional borrowing.

The scenarios do not attribute higher rates to any particular cause. The CBO itself cautions that the budgetary consequences of higher rates depend in part on why they rise. That caveat is central to the present argument. The exercise nonetheless establishes the fiscal significance of modest, persistent differences in financing costs. Nor is the range it examines remote. In the CBO's economic forecast the ten-year Treasury yield averages 4.3 per cent over the period from 2026 to 2036. The October report notes that the same yield closed at 5.2 per cent on 1 October 2026. A single closing yield is not equivalent to the average effective rate on the debt over a decade. The comparison indicates only that the scenarios are not merely hypothetical.

The strategic implications remain political rather than mechanical. Higher taxation, expenditure restraint, stronger growth and continued borrowing represent different responses to fiscal pressure. Defence expenditure and overseas commitments compete with other claims on federal resources. Rising debt does not determine which programmes should be reduced. The more relevant question concerns the economic return from maintaining particular international commitments.

That return is difficult to calculate. Military expenditure includes personnel, procurement, research and infrastructure serving several purposes simultaneously. Alliances provide access, intelligence, deterrence and institutional influence that cannot be valued solely through their operating costs. Some commitments may impose expenditures disproportionate to their strategic benefits. Others may provide advantages that would be considerably more expensive to reproduce independently. The assertion that American leadership has become unaffordable consequently requires more than a comparison between public debt and defence spending. It requires an account of what the United States receives in exchange for sustaining its international position. One possible benefit is the ability to borrow on more favourable terms.

What the dollar provides

The international role of the dollar creates demand for American financial assets that extends beyond the financing requirements of the federal government. The currency is widely used in international trade, cross-border banking, foreign-exchange transactions and official reserve management. Treasury securities provide a deep and liquid market in assets used for collateral, liquidity management and the pricing of financial risk.

These functions reinforce one another. Dollar invoicing encourages firms and banks to maintain dollar liquidity. Deep financial markets reduce the cost of obtaining it. Established contractual practices make continued use of the currency attractive even to institutions and governments that would prefer a more diversified monetary system. These advantages are substantial. They should not be confused with an unlimited capacity to borrow. Investors continue to assess inflation, expected returns, fiscal conditions and institutional credibility. The Federal Reserve cannot guarantee permanently favourable financing conditions without regard to its monetary objectives.

The privilege can be expressed more precisely through the concept of the convenience yield. Research by Arvind Krishnamurthy and Annette Vissing-Jorgensen shows that investors accept lower yields on Treasury securities because these assets provide liquidity and safety services that otherwise comparable securities do not. Their estimates imply that these services lowered Treasury yields by an average of 73 basis points between 1926 and 2008. The convenience yield is not identical to the entire advantage conferred by the dollar's international position. Its importance for the present argument lies in showing that financial privilege has a price dimension. The advantage can strengthen or weaken without any abrupt change in the international monetary hierarchy.

The same research carries an implication that bears directly on the argument. The demand for Treasury convenience slopes downward. The convenience yield is high when Treasury debt is scarce relative to GDP and low when it is abundant. If that relationship persists, rising federal indebtedness erodes part of the privilege independently of any geopolitical development. Fiscal expansion and strategic retrenchment would then act on the same price through different channels. A narrowing of the convenience yield observed alongside retrenchment could reflect the growing supply of Treasuries as plausibly as any loss of geopolitical confidence. Any attempt to measure the geopolitical component of American financial privilege must therefore control for the supply of the asset itself.

Emmanuel Farhi and Matteo Maggiori provide a theoretical rationale for a related concern. In their model a hegemonic issuer of reserve assets earns monopoly rents yet becomes exposed to shifts in confidence as its issuance grows. The scale of issuance is thus one of the variables on which the stability of the privilege depends.

Recent reserve data illustrate the difference between a price and a status. According to the International Monetary Fund's September 2026 COFER release, the dollar accounted for 56.70 per cent of global foreign-exchange reserves in the second quarter, compared with 57.18 per cent in the first. Dollar-denominated claims were broadly unchanged in absolute terms. Holdings of other currencies increased. The euro's share rose from 20.04 to 20.60 per cent, with the Fund attributing most of that increase to active purchases. The renminbi's share increased from 1.98 to 2.11 per cent.

These movements indicate diversification at the margin rather than withdrawal from dollar assets. They also show why changes in reserve shares cannot be treated as direct measures of confidence in American fiscal policy. Portfolio reallocations, valuation effects and liquidity requirements all influence the composition of reserves. Diversification does not imply the emergence of a successor. The euro area possesses substantial financial markets and an established monetary authority but lacks a unified sovereign debt market comparable in structure and scale to the Treasury market. The international development of the renminbi remains constrained by China's capital-account arrangements and financial governance. A monetary system can become more diversified while remaining organised around its dominant currency.

The security dimension of monetary power

The connection between security arrangements and international currency choice is neither new nor merely speculative. In Mars or Mercury? The Geopolitics of International Currency Choice, Barry Eichengreen, Arnaud Mehl and Livia Chițu examined the relationship between military alliances and the currency composition of reserves. Using data for nineteen countries before the First World War, a period in which reserve composition is documented and security alliances proliferated, they found support for both economic and geopolitical determinants of currency choice. A military alliance raised the share of the partner's currency in a country's reserves by around thirty percentage points.

The authors also considered a hypothetical American withdrawal from international security commitments. Their estimates suggested that long-term United States interest rates could rise by as much as 80 basis points, under the assumption that the currency composition of global reserves changed while their overall level did not.

That figure matters precisely because it is not an estimate of what contemporary American policy has caused. It is a conditional result derived from historical relationships and from assumptions about portfolio reallocation. The institutional environment, the scale of financial markets and the structure of international monetary demand have changed considerably since the period on which the estimates draw. The study nevertheless establishes that the link between security guarantees and reserve demand is an empirical question rather than a rhetorical association.

A Federal Reserve paper by Colin Weiss, published in October 2022, approached the problem from a different direction. Weiss observed that countries maintaining some form of military relationship with the United States accounted for approximately three-quarters of foreign official holdings of safe American assets. The concentration is striking. Its causal interpretation remains uncertain. Military alignment and financial integration frequently develop within the same institutional relationships. American security partners also tend to maintain extensive commercial connections with the United States, sophisticated financial systems and reserve-management practices that favour dollar assets independently of their security arrangements.

The observed relationship is compatible with several explanations. Alliances may encourage demand for American assets directly. They may do so indirectly by supporting trade and financial integration. Military alignment and reserve composition may also both reflect deeper economic and institutional similarities. Weiss accordingly cautioned that, without changes in the economic incentives for holding dollar reserves, a heightened threat of sanctions was unlikely to reduce the dollar's reserve share drastically.

The development of the post-war order explains why these relationships are difficult to separate. Security guarantees, international institutions, trade arrangements and financial integration expanded within a connected political framework. Over time the financial structures acquired considerable autonomy from the political circumstances that had supported their development. A government can oppose Washington diplomatically while continuing to hold American assets. A bank can regard American foreign policy as unpredictable while relying on dollar markets because the alternatives are less liquid or more expensive. This autonomy limits the immediate financial consequences of geopolitical disagreement. It does not establish that geopolitical relationships are economically irrelevant.

Flows, prices and the problem of identification

Evidence from periods of geopolitical tension complicates the assumption that political divergence produces an equivalent financial withdrawal. In an August 2023 analysis, Weiss examined investment flows into the United States during 2022, a year marked by Russia's invasion of Ukraine and extensive financial sanctions. Focusing on investors in countries with heightened geopolitical tensions with Washington, he found little evidence of broad financial fragmentation through purchases of American securities. Economic incentives remained decisive even as political relationships deteriorated.

Aggregate flows nevertheless conceal differences between asset classes and investor types. Foreign purchases of American equities do not finance the federal government in the way purchases of Treasury securities do. Official reserve managers and private asset managers operate under different objectives and constraints. The Treasury International Capital figures released on 16 October 2026 illustrate the point. Foreign residents recorded net purchases of long-term American securities of $300.7 billion in August, of which $257.8 billion came from private investors and $42.9 billion from official institutions. Overall net TIC inflows, including short-term securities and banking flows, amounted to $199.8 billion. In the same month foreign holdings of Treasury bills fell by $47.8 billion.

These figures do not support the proposition that international investors are abandoning American markets. Nor do they establish that the terms on which investors hold American liabilities are unchanged. A transaction records a quantity exchanged at a prevailing price. Strong purchases can coexist with higher yields if investors require greater compensation. Weaker purchases need not signal declining confidence if prices have moved in the opposite direction. Observed flows trace equilibrium outcomes rather than the underlying demand curve.

A deterioration in American financial privilege would therefore probably not resemble a currency crisis. It would appear as a gradual increase in the return investors require to hold Treasury securities. Treasury yields reflect expectations about future short-term rates, inflation and growth together with compensation for duration risk. They are lowered by the convenience yield. A weaker convenience yield or a higher term premium could raise borrowing costs without any visible collapse in international holdings. Central banks might keep existing dollar reserves while directing more incremental purchases elsewhere. Private investors might shorten duration or hedge more. Foreign institutions might continue buying Treasuries at higher yields. Applied to a large and growing stock of debt, such adjustments could acquire substantial fiscal importance.

The difficulty lies in establishing causation. A rise in Treasury yields during a period of diplomatic tension does not show that geopolitical uncertainty caused it. Monetary-policy expectations, inflation, growth and the supply of government securities may offer better explanations. The CBO's October scenarios quantify the cost of more expensive borrowing without identifying its origin. The studies linking alliances to reserve composition establish an association without conclusively isolating the financial contribution of security guarantees. The research on the convenience yield shows that the supply of debt can move the same price. The missing evidence concerns the transmission between geopolitics and yields. How much of the demand for Treasury securities is attributable to geopolitical relationships rather than to market characteristics? How sensitive is that demand to the perceived reliability of American commitments? How would a change in official reserve allocation affect yields once private investors, monetary policy and supply are taken into account? The existing literature provides reasons to investigate these questions. It does not justify treating their answers as settled.

The economics of strategic retrenchment

There are legitimate economic arguments for reducing selected American international commitments. Overseas obligations absorb resources that could support domestic investment, fiscal consolidation or capabilities judged more important to national security. Some arrangements inherited from earlier periods may no longer correspond to the distribution of economic and military power. A negotiated redistribution of responsibilities among allies could reduce direct American expenditure while preserving many of the institutional benefits of cooperation.

The financial consequences of retrenchment therefore depend on its design. An orderly reallocation of responsibilities differs from an unpredictable withdrawal of support. The former may strengthen an alliance by distributing its costs more evenly. The latter may lead partners to reconsider the reliability of existing guarantees and to develop alternatives. Alliances are not simply expenditures. They provide access, coordination, intelligence and political influence. Their economic contribution cannot be established by comparing annual appropriations with an assumed monetary benefit.

There is nevertheless a structural asymmetry in the way costs and benefits become visible. The costs of international commitments appear in public budgets and political negotiations. Some of their potential financial benefits are dispersed across markets and expressed indirectly through liquidity, institutional confidence and the willingness of foreign investors to hold American assets. A reduction in expenditure can produce an immediate and measurable saving. Its consequences for financial relationships, if any, emerge only gradually. This does not mean that maintaining international commitments is always economically preferable. It means that evaluating retrenchment solely through its immediate budgetary effects may omit relevant consequences.

A possible feedback mechanism follows. Rising debt increases the fiscal importance of borrowing costs. Greater debt-service expenditure narrows the resources available for other priorities and may increase pressure to reduce international commitments. If retrenchment weakens some of the institutional relationships supporting demand for American assets, borrowing conditions could become less favourable and add to fiscal pressure. The supply effect documented by Krishnamurthy and Vissing-Jorgensen would operate in the same direction regardless of geopolitics. Every link in this sequence is economically intelligible. The sequence as a whole remains unproven. It may fail to materialise if retrenchment is orderly, if network effects dominate geopolitical considerations or if alternative assets remain insufficiently attractive. It could also be offset by fiscal savings large enough to improve investor confidence. These countervailing possibilities are not qualifications added after the argument. They are part of the argument itself.

China and the limits of substitution

China illustrates why a weakening of American financial primacy would not automatically produce a corresponding transfer of monetary power. Beijing has strategic reasons to reduce its exposure to financial arrangements in which American regulatory authority and sanctions have international reach. The freezing of Russian central-bank assets after the invasion of Ukraine demonstrated that reserve assets may carry political risks not captured by conventional portfolio analysis. Alternative payment arrangements, expanded renminbi settlement and greater reserve diversification can reduce particular dependencies.

China also depends on the stability of an international economy in which dollar-based transactions remain extensive. Its exporters require foreign demand. Its financial institutions interact with dollar markets. Its trade in energy and raw materials depends on functioning international payment systems. A disorderly breakdown of American financial centrality would not necessarily serve Chinese interests. Nor would confidence withdrawn from American institutions transfer automatically to Chinese ones. Reserve managers require liquidity, predictable legal arrangements and the ability to deploy assets under changing market conditions. China's capital controls and financial governance limit the renminbi's capacity to perform the functions of the dollar.

China may therefore benefit from a gradual diversification of the international financial system without seeking an abrupt replacement of the dominant currency and without being able to produce one. Changing the currency in which a transaction is settled differs from changing the underlying structure of financial dependence. Trade invoiced in renminbi may still involve firms or banks reliant on dollar funding, dollar collateral or American capital markets. The international monetary order may become more diversified without becoming fully multipolar.

The cost of financial primacy

The United States retains formidable material capabilities. Its economy remains large and diversified. Its financial markets are exceptionally deep. Its technological and institutional resources are substantial. None of these advantages disappears because federal indebtedness has increased. Its fiscal trajectory nevertheless indicates growing competition between inherited obligations and future political choices. A country can remain exceptionally powerful while the terms on which it exercises that power become more restrictive.

The international role of the dollar complicates this relationship. American monetary centrality provides financial advantages that cannot be attributed exclusively to military or diplomatic leadership. Market liquidity, institutional credibility and accumulated financial practice remain essential. Historical research nonetheless suggests that geopolitical relationships have influenced international currency choice. The problem cannot be resolved by asserting either that American alliances sustain the dollar or that the dollar finances American alliances. Both propositions capture part of a broader relationship without establishing its causal structure.

A more useful analytical concept is the cost of financial primacy: the economic, institutional and geopolitical conditions necessary to preserve the advantages of issuing the dominant international currency. Some of these conditions are produced by markets. Others depend on monetary institutions, legal credibility and financial infrastructure. Still others may be influenced by the security relationships through which the United States has organised much of its international position. One of them lies under the direct control of Washington: the pace at which it adds to the supply of the asset whose relative scarcity underpins the privilege. The central question is how far the United States can reduce the expenditure associated with global leadership without weakening the conditions that sustain its financial advantages.

Three empirical inquiries would help establish the answer. The first concerns changes in the Treasury convenience yield during episodes of significant political strain between the United States and its security partners, controlling for changes in Treasury supply. The second concerns the composition of foreign Treasury demand, distinguishing official from private investors and examining whether allied reserve managers respond differently to changes in American policy. The third concerns the relationship between changes in that demand and the yields required to place additional issuance. None of these inquiries is straightforward. Their value lies in making the relationship between geopolitical leadership and financial privilege measurable rather than merely suggestive.

The United States can finance its debt without preserving every dimension of its historical international role. Whether it can preserve the full economic advantages of that role while substantially reducing the commitments associated with it is a different question. The answer will depend on the conditions under which the rest of the world continues to find American financial centrality useful. Those conditions were shaped over generations by economic institutions, market structures and political relationships. Their durability should not be confused with independence from the order in which they developed.

The cost of American power cannot be measured solely by what Washington spends to maintain it. An adequate accounting must also consider what that expenditure helps make possible and which advantages would survive its withdrawal. The two sides of that calculation appear in different accounts, mature over different periods and cannot always be expressed in the same units. That difficulty is not a reason to avoid the calculation. It is the reason the calculation matters.

References

AI assistance statement

In preparing this article, the author used Perplexity, developed by Perplexity AI, Inc, as research and editorial assistant, and, more generally, Google’s AI research tools and services, including Gemini.

These tools supported the identification of relevant literature and institutional sources, the examination of economic data, the development of the research dossier, and the drafting, restructuring and revision of the manuscript.

The article originated from the author’s own analysis of the relationship between American public indebtedness, the international role of the dollar and the geopolitical commitments underpinning US global leadership. The author formulated the central research question, conceived The Cost of Power as a broader series on the financial foundations of geopolitical influence, and established the interpretative direction of the research. The supporting dossier was developed through an iterative process of discussion, documentary research and critical examination of the available evidence, with AI assistance.

The author retains responsibility for the selection and interpretation of sources, the arguments advanced and the final editorial decisions. All figures, references and factual claims are subject to verification against the cited primary sources before submission. The author accepts full responsibility for the published content.

The Cost of Power examines the relationship between financial capacity, institutional credibility and geopolitical influence. This essay is the first in a series on the economic foundations and strategic constraints of contemporary great-power competition.