The Exorbitant Privilege

38 trillion dollars in debt, one trillion dollars in annual interest payments, deficits of 7 percent of GDP — and still no debt crisis. The United States lives in a fiscal parallel universe. The key is called: Dollar.

I. The Numbers of Madness

In fiscal year 2025, the US government paid over one trillion dollars in interest on its national debt for the first time. That's more than the entire defense budget. More than Medicare. Interest expenses are now the second-largest item in the federal budget — surpassed only by Social Security.

Total debt stands at about 38 trillion dollars; the debt held by the public alone amounts to roughly 100 percent of gross domestic product. The Congressional Budget Office projects the debt ratio will rise to 120 percent by 2035. Annual deficits are settling at 6 to 7 percent of GDP — in normal times, mind you, not during a crisis.

For any other country, these numbers would trigger a debt crisis. Greece became a restructuring case in 2010 at a debt ratio of 146 percent. Argentina is a chronic defaulter at similar levels. But the United States? They continue paying interest below 5 percent and find buyers for their bonds without difficulty.

II. What Is the Exorbitant Privilege?

The term comes from French Finance Minister Valéry Giscard d'Estaing, who complained about the dollar's special status in the 1960s. The "exorbitant privilege" refers to the advantages the United States derives from the dollar being the world's reserve currency.

The numbers are impressive: About 58 percent of all global currency reserves are held in dollars. Over 80 percent of trade finance and around half of all trade invoices run in dollars — even when no American party is involved. A South Korean automaker buying oil from Saudi Arabia pays in dollars. A German company importing electronics from Taiwan pays in dollars. About 90 percent of all foreign exchange transactions involve the dollar.

This means: The world needs dollars. Not because they like America, but because the global financial system is built on the dollar. And where do you park dollars? In US Treasuries — the deepest, most liquid, and (so far) safest market in the world.

III. The Concrete Advantages

First: Lower interest rates. Because demand for US Treasuries is structurally high, the United States can borrow more cheaply than other countries with comparable debt ratios. A CEPR study estimates that the privilege increases maximum sustainable debt by about 22 percent of GDP. For the American economy, that's over 5 trillion dollars of additional headroom.

Second: No exchange rate risk. The United States borrows 100 percent in its own currency. If the dollar falls, their debts become lighter, not heavier. Countries like Argentina or Turkey that borrow in foreign currency experience the opposite when their currency depreciates — their debts explode.

Third: Seigniorage. The United States profits from other countries wanting to hold dollars. Every dollar sitting in a Chinese or Japanese central bank is an interest-free loan to the United States. Economists estimate this advantage at 0.3 to 0.6 percent of GDP — annually.

Fourth: Geopolitical power. The dollar is an instrument of foreign policy. The sanctions against Russia after 2022 demonstrated what it means to be cut off from the dollar system: 300 billion dollars in frozen reserves, economic collapse, technical sovereign default.

IV. The Largest Creditors

Japan and China together hold almost 2 trillion dollars in US government bonds. Why? Not out of friendship, but for lack of alternatives. There is no other market that can absorb so much capital without collapsing. Even if China wanted to sell its Treasuries — where would the money go? The euro bond market is fragmented, the Chinese yuan is not freely convertible.

V. Why the Privilege (Still) Holds

The dollar has network effects. The more people use it, the more useful it becomes. This creates an inertia that is hard to overcome. Changing reserve currencies is like changing languages — theoretically possible, practically enormously difficult.

Historically, such changes have occurred: The British pound lost its status to the dollar between the world wars. But that took decades and required two world wars plus the collapse of the British Empire. There is no "soft" transition for reserve currencies.

VI. The Erosion Begins

And yet: The privilege is not eternal. A CFA Institute survey of global financial experts found that 63 percent expect the dollar to lose its reserve currency status at least partially within the next 5 to 15 years. 77 percent consider US government finances unsustainable.

The signs are visible: China has been reducing its Treasury holdings for years. The BRICS nations are working on alternative payment systems. The dollar's share of global reserves has fallen from 71 percent in 2000 to 58 percent — slowly but steadily.

Particularly troubling: The factors that support the privilege — rule of law, central bank independence, predictable policy — are increasingly being questioned. The threats to fire Fed Chair Powell, the debt ceiling as political hostage, the erratic tariff policy — all of this undermines the trust on which dollar status rests.

"If we lost the world standard dollar, that would be like losing a war." — Donald Trump, 2025

VII. What a Loss Would Mean

Should the privilege erode, the consequences would be dramatic. Without structural foreign demand for Treasuries, interest rates would rise — not by basis points, but by percentage points. Mortgages would become more expensive, corporate loans too. The decades-long subsidization of American consumption by foreign savers would end.

The geopolitical consequences would be equally severe. Without dollar dominance, no effective financial sanctions. Without sanction power, less influence on global conflicts. The American business model — consumption on credit, financed by the rest of the world — would no longer work.

VIII. The Contrast to Germany

For the German debt debate, the US case is an important counterpoint. Germany has none of the American privileges: no currency of its own, no reserve currency status, no Federal Reserve as backstop.

The euro is a shared currency without fiscal union. The ECB is formally prohibited from financing governments. The Eurozone has 21 different government bond markets, none as deep and liquid as the American one. Greece showed in 2010 what happens when a euro country loses market confidence.

This doesn't mean Germany can't take on debt. But it means the MMT arguments — "a state in its own currency cannot go bankrupt" — don't apply to Germany. Germany doesn't have its own currency. It is a user of the euro, not its creator.

IX. Conclusion: Privilege Is Not a Law of Nature

The United States can afford things denied to other countries. This is not an expression of economic superiority, but of historical path dependence and geopolitical power. The dollar became the reserve currency because America accounted for half of global economic output in 1944 and was the only country to emerge from the war with its industry intact.

These conditions no longer exist. America's share of the global economy has fallen to 25 percent. China is the largest trading partner for more countries than the United States. The privilege holds through inertia and lack of alternatives — neither of which are solid foundations.

For the rest of the world, a sober realization remains: The rules of government debt are not the same for everyone. What America can do, others cannot copy. Those who use US deficits as an argument for their own debt excesses confuse privileges with principles.

And for America itself? The privilege is a gift that can be abused. Every trillion dollars of additional debt tests the world's tolerance. At some point, the test might fail — and then the exorbitant privilege becomes an exorbitant bill.