One year into Donald Trump’s second term, the global economic order is being given a facelift that wouldn’t look out of place at his Mar-a-Lago beach club. The President has turned his famous penchant for tariffs—“the most beautiful word in the English language”—into an agenda for national rejuvenation, imposing them on allies and enemies alike. Stunned commentators have made various attempts to interpret the sweeping trade restrictions: as a break with the US role in superintending world capitalism, a tool to bully individual states into signing favorable deals, or a mindless assertion of raw power. Yet there is still no consensus about either the nature of this shift or its long-term implications. 

Some have sought answers in the work of Trump’s former economic adviser Stephen Miran, now member of the Federal Reserve’s board of governors, whose policy document A User’s Guide to Restructuring the Global Trading System was published in the runup to the 2024 election. The paper appears to explain the logic behind many of the decisions which have played out since, calling for a “generational change” to “put American industry on fairer grounds vis-à-vis the rest of the world,” with tariffs the primary vehicle. The dollar’s strength for the past half century, writes Miran, has made US exports too expensive for the rest of the world to buy, while making imports too cheap for American consumers to pass up. The result has been the degradation of American manufacturing and industrial output. “Persistent dollar overvaluation” is said to flow from the way in which “dollar assets function as the world’s reserve currency.” It is simply too burdensome for the US to “finance the provision of reserve assets and the defense umbrella, as the manufacturing and tradeable sectors bear the brunt of the costs.”

Miran is not alone in arguing for the dollar’s devaluation. The belief that the currency’s global role puts the US at a structural disadvantage has a long history which stretches back to the early decades of the postwar era. Yet the fact that this view has outlasted that world of fixed exchange rates and gold convertibility, and has more recently been adopted by many in Trump’s orbit, reveals a deep misconception about how the twenty-first-century international monetary system actually works. Whereas it was once assumed that trade dynamics formed the basis of exchange rates, the situation has since changed beyond recognition, as currency obligations have become tied to the ballooning world of finance. 

Today, most dollar obligations extend beyond the traditional boundaries of the nation state. Offshore dollar creation is so prevalent that we can think of the dollar as a privatized and to some extent a “denationalized” currency. The vast network of dollar creation, trading, and lending outside the US amounts to an Offshore Dollar System that plays a crucial role in sustaining American power. An accurate understanding of this system puts paid to Miran’s notion that the US’s debtor status is somehow a symptom of decline, and that currency devaluation via tariffs is the path to restoration. 

In what follows, we will first describe the development of the international monetary system from the era of Bretton Woods to the age of the offshore dollar. We will then explain how this system is likely to be reshaped over the coming years, as Trump’s misconceived tariff program provokes unprecedented trade wars and intensifies competition with China. What are the implications of this deepening disorder? It is possible to imagine four divergent scenarios, each of them favoured by different political coalitions: the rise of competing monetary blocs with their own distinct geopolitical alignments; the continuation of financial globalization, with the US assuming an even more coercive role; the collapse of the monetary order into a state of anarchy; and the establishment of a new transnational payments union. 

Postwar Origins

The Bretton Woods System, designed towards the end of the Second World War, pegged the US dollar to gold, while all other units of account had exchange rates fixed but adjustable to the dollar. Figure 1 gives a schematic view of this system and its various “monetary areas,” characterized by national “units of account” or currencies. All monetary areas, including the US at the top of the apex, relied on central bank money (bank notes and reserves) and commercial bank money (deposits).)“What is Money in a Critical Macro-Finance Framework?”(<)/a(>), (<)em(>)Finance and Society. (<)/em(>)2020; 6(1): 55–66.” class=”footnote” id=”footnote-1″ href=”#footnote-list-1″>1

Figure 1—The design of the Bretton Woods System

CAD: Canadian dollar; DM: Deutsche Mark; FFR: French franc; GBP: British pound; ITL: Italian lira; USD: US dollar.

At the beginning of this period, New Deal banking reforms meant that American financial activity outside the regulated banking system was largely suppressed. Individual states played a dominant role in the monetary and financial system. Money creation, such as the creation of deposits against loans, took place predominantly onshore, within the legal space of the monetary jurisdiction. There was thus a “triple coincidence” of political, economic, and monetary areas. Despite the fact of gold convertibility, Bretton Woods was essentially a credit money system, with the balance sheets of the Fed and US banks functioning as its dynamic core. 

The Nixon administration argued that the Bretton Woods System, with the dollar at its center, was rigged against the US. Under this arrangement, it pointed out, America had gone from having the world’s greatest trade surplus to having the largest deficit. So, as the fixed exchange-rate system came under pressure from gold outflows and market volatility, Washington refused to defend it, unilaterally putting an end to gold convertibility in 1973. This ushered in an era of floating exchange rates between national currencies.)https://www.bis.org/publ/work851.pdf(<)/a(>).” class=”footnote” id=”footnote-2″ href=”#footnote-list-2″>2 

The dollar, however, remained the international unit of account. To preserve its role as currency peg, central banks outside the US had to keep dollar-denominated instruments—notes, deposits, and US Treasury securities—in their foreign exchange reserves. Private financial institutions likewise began to create their own USD-denominated instruments and use them to make cross-border payments, without the intermediary of other domestic currencies. Dollars were thus created offshore and placed in circulation beyond the formal jurisdiction of the Fed. The triple coincidence had come apart. 

After Bretton Woods

Figure 2 provides an overview of how offshore dollar creation expanded. The Eurodollar market—i.e. dollars created privately and offshore—first began to emerge in the late 1950s, while Bretton Woods was still in place. At this time many central bankers saw it as a threat to their monetary sovereignty and attempted to fight its rise. Yet after the Nixon shock of 1973 they reversed course and actively endorsed offshore dollar creation by non-US banks, which rose sharply over the following decades. As financial markets were liberalized, new financial instruments were developed in the US to play the role of deposit substitutes or shadow money: money market fund (MMF) shares, repurchase agreements (repos), and asset-backed commercial papers.)https://journals.law.harvard.edu/hblr/wp-content/uploads/sites/87/2014/09/Regulating-Money-Creation.pdf(<)/a(>).” class=”footnote” id=”footnote-3″ href=”#footnote-list-3″>3 From the 1980s onward, these same financial instruments increasingly appeared offshore.

Figure 2—The emergence of offshore USD creation

ABCPs: Asset-backed Commercial Paper; MMF: Money Market Fund; Repos: Repurchase Agreements.

The financial crisis of 2007–08 proved to be an inflection point: both an onshore run on the US-centered shadow banking system and an offshore run on the Eurodollar market. The Federal Reserve moved to save the Offshore Dollar System by reintroducing swap lines, agreeing to give emergency dollar liquidity to the rest of the world, sometimes in unlimited quantities. Since then, offshore dollar-denominated instruments have continued to expand, with the Fed acting as a global backstop—ready to step in and provide dollars on highly favorable terms whenever the system falters, as it did during the Eurocrisis and the Covid-19 pandemic. 

In Figure 3 we can see the hierarchical relation between the different monetary areas of the post-Bretton Woods system. The dollar remains at the apex, with other currencies spread out beneath it according to their access to dollar liquidity. The Euro area, Japan, and the UK are immediately under the US given their unlimited access to swap lines from the Fed. The BRICS are a further tier down, since they do not have swap lines but can nonetheless access emergency USD liquidity by other means.)repo facility(<)/a(>), thanks to their sizable volume of US Treasury securities to pledge as collateral.” class=”footnote” id=”footnote-4″ href=”#footnote-list-4″>4 On the next level are the countries of the Global South whose best bet for emergency dollar liquidity is the Special Drawing Rights (XDR) system operated by the International Monetary Fund.

Figure 3—The structure of the Offshore US-Dollar System

AUD: Australian dollar; EUR: euro; GBP: British pound; INR: Indian rupee; PLN: Polish złoty; RMB: Chinese renminbi; RUB: Russian ruble; SFR: Swiss franc; USD: US dollar; ZAR: South African rand

Power of the dollar

Unlike Bretton Woods, then, the Offshore Dollar System was not created by design but through a series of contingent developments. Though politicians have often promoted the dollar’s role abroad, the main agents here were market actors who tried to circumvent the control of policymakers by producing offshore dollars and various dollar-denominated financial instruments. Their unregulated activities led to repeated crises, which technocrats tried to contain through a series of ad hoc measures such as swap lines—which, in turn, became part of the global monetary architecture. 

Despite this lack of foreplanning, though, there is no doubt that the system has given the US immense privileges. Sitting at the top of the pyramid, American authorities are able to weaponize access to international finance for countries lower down: a crucial means of exerting influence over the global periphery. The Treasury can also sell its debt abroad to buyers who are forced to accept its terms. All this works to the benefit of US financial institutions and preserves the status of New York as the financial center of the world. 

As we have seen, the Offshore Dollar System relies on the Fed to hold it together in moments of crisis. Shocks to the system typically cause market actors to shift their offshore dollars onshore, at which point the Fed becomes the overseas lender of last resort. Because the Fed has no formal mandate to play this role as the world’s central bank, however, it must always frame its offer of emergency liquidity to other countries in terms of domestic considerations. This is a political vulnerability which critics like Miran are now seeking to exploit: claiming that national interests are being subordinated to the stabilization of the international economic order. For Miran, the practice of supplying currency to the rest of the world has forced the US to accrue a massive trade deficit, which he describes as a “sacrifice” for global dollar supremacy. 

This is a straightforward inversion of the real relation. It would be more accurate to say that the dollar’s dominance—as a partially denationalized currency—is what gives the US the freedom to import so much more than it exports. Although the country has become greatly indebted to the rest of the world, its debt is denominated in a currency whose ultimate means of settlement it controls. The US can also fund this deficit in part by selling its own sovereign debt, which Washington has successfully branded as a “global safe asset,” to international counterparties. This grants the American government and asset-owning classes various unique advantages, including the ability to keep taxes down—compensating for relatively low intake with sovereign debt issuance and an elaborate system to keep the market for US treasury securities deep and liquid. The effect of this complex configuration on the dollar’s external valuation remains highly speculative, as the exchange rate depends on many factors other than the current account position. The dollar’s under- or over-valuation does not have a single cause—which means that Miran’s ambition to restore its proper value by simply adjusting the balance of trade is misplaced.

Four futures

How will Miran’s ideas shape the future of the monetary system? Four outcomes are foreseeable. The first is that persistent tariffs lead to a reduction in global trade and value chains become increasingly regionalized. This would cause the process of financial globalization that has proceeded apace for the past four decades to slow. The US trade deficit would likely shrink, as its partners are pressured into trade agreements preferential to Washington, and the Offshore Dollar System may well cede its global reach. As it retrenches, increased regional payments would allow for the internationalization of other currencies, decreasing the dominance of the dollar. 

We could then witness the rise of competing monetary blocs, with different monetary jurisdictions clustered around regional key currencies. The US would likely form a bloc with other Anglophone states like the UK and Australia, further decoupling from the EU and undermining transatlantic security cooperation (as with recent US sabre-rattling on Greenland). The result would be to encourage China to continue its internationalization of the renminbi, turning it into a major regional currency. Squeezed by mounting US-China competition, European policymakers may accelerate efforts to maintain ground both in geopolitics and international monetary affairs—for example, by pursuing new initiatives to promote offshore euro creation. 

Scenario One—Competing Monetary Blocs

AUD: Australian dollar; EUR: euro; GBP: British pound; INR: Indian rupee; PLN: Polish złoty; RMB: Chinese renminbi; RUB: Russian ruble; SFR: Swiss franc; USD: US dollar; ZAR: South African rand

The second scenario is that the as yet unrealized Mar-a-Lago Accord, promoted by Miran, enables financial globalization to continue while at the same time making other currencies more competitive with the dollar. This is the preferred outcome for the Wall Street faction within the second Trump administration, who benefit most from the current setup. It would permit the dollar to maintain its hegemonic position while passing on some of its perceived disadvantages to trading partners. The Fed’s swap network could be further weaponized, with only those countries that submit to Washington’s demands granted access, while the global weight of offshore money and shadow bank money would continue to grow.

Scenario Two—Continued Financial Globalization

BRL: Brazilian real; EUR: euro; GBP: British pound; INR: Indian rupee; JPY: Japanese yen; RMB: Chinese renminbi; RUB: Russian rouble; USD: US dollar; ZAR: South African rand

Yet while scenarios one and two assume that the Trump administration will avoid a major monetary crisis, this cannot be taken for granted. Given that the Offshore Dollar System rests on the status of US Treasury securities as a safe asset, things would look drastically different if rating agencies were to downgrade the US Treasury as a sovereign debt issuer. Miran suggests in his User’s Guide that US Treasury securities could be forcibly converted into “special century bonds,” which would amount to a technical default on US sovereign debt. Were the Federal Reserve to decide that it would no longer act as the ultimate backstop for the dollar system—a plausible prospect considering the nomination of Trump acolyte Kevin Warsh as chair—this could cause a run on offshore USD instruments, unravelling the international monetary system as we know it. 

In this scenario, the current order of currencies, institutions, and instruments would be radically destabilized. The Offshore Dollar System would come to an end—yet with no clear structure to replace it, we would quickly descend into an anarchic situation. This would be welcomed by the Big Tech faction of the Trump administration, who hope for a dramatic scaling back of the US state. The removal of the Federal Reserve swap network would be the ultimate “chainsaw” event, on a level that Musk’s DOGE never even came close to reaching. 

The sketch below sets out the main features of this hypothetical future in which there is a plethora of different monetary arrangements: Country A maintains a system similar to the present one (albeit with fewer shadow money and offshore components); Country B reverts to a regulated onshore system resembling that of the 1950s, with only central and commercial bank money; Country C adopts a fully public system that exists exclusively onshore; Country D creates fully private banking system with a potentially strong offshore component. Another group of states experiments beyond established credit money systems: Country E could be one of Quinn Slobodian’s “libertarian zones,” introducing a pure cryptocurrency system; Country F returns to a gold-based currency; Country G plunges into a Hobbesian state of nature where the “trust” necessary for a monetary system has broken down entirely and a barter economy has risen in its place. 

In this eventuality, new forms of cross-border payment solutions may well work to the benefit of Big Tech. In 2019, Facebook’s Libra made headlines for its attempt to monetize the social media company’s global network by connecting it with payment services. The plan was shot down by regulators, but in more anarchic circumstances it could have proven successful. 

Scenario Three—International Monetary Anarchy

The final scenario, which could also take shape amid a monetary crisis, is a payments union involving transnational cooperation among monetary technocrats. Naturally, the question of what an alternative monetary system might look invites all kinds of speculation, but the figure below outlines one possibility that would not entail a break with existing institutions. The general idea is that, after the failing of the swap network and the large-scale winding down of offshore USD, central bankers would agree to redesign the commanding heights of the international monetary system. To this end, they would shift the clearing and settlement of international payments—no longer protected by a US lender of last resort—to an international institution. The clearest candidate would be the Bank for International Settlements (BIS) in Basel, which is also where the international central banking community meets on a regular basis to discuss international monetary affairs. The BIS was once the apex institution for the European Payment Union that existed from 1950 to 1958 and used its own unit of account to operate the clearing and settlement of cross-border payments.

If the BIS were to run an International Payment Union not denominated in USD, it would likely make use of special drawing rights (XDR)—a  basket comprising the world’s major currencies—as a unit of account, since it already uses this internally. In this scenario, in which cross-border payments would have to be cleared via the BIS, it would no longer be necessary to have offshore money creation in national units of account. The scope of currencies would be restricted again to specific  monetary jurisdictions. This would entail some return to monetary sovereignty in a “Westphalian” sense. Because a central-bank-centric system can hardly afford to relegate exchange-rate determination to market forces, it is likely that politically determined fixed but adjustable exchange rates—such as we saw during the Bretton Woods era—would also make a comeback. 

The Trump administration would never agree to such a union, nor would it be supported by any part of the ruling political coalition. This outcome would only be conceivable if the MAGA regime was replaced by a government seeking to rebuild international institutions, backed by US monetary technocrats willing to engage in international monetary cooperation. At present, this looks a long way off. 

Scenario Four—International Payment Union

BIS: Bank for International Settlements; EUR: euro; GBP: British pound; JPY: Japanese yen; RMB: Chinese renminbi; USD: US dollar; XDR: Special Drawing Rights; ZAR: South African rand

The Trump-Miran argument for the need to weaken the value of the dollar betrays a fundamental misunderstanding of the dynamics of the global monetary system. Those who want to translate their nativist politics into monetary precepts have failed to reckon with the credit-based, often offshore-created, nature of money today. What will emerge from this ideological forcefield remains unclear, but it is likely that a number of schisms will develop. Die-hard national-populists will strive for a less integrated global system in the hope of reshoring blue-collar jobs; Wall Street will cleave closer to  the status quo, not wanting to kill the goose that lays the golden eggs; and the libertarians in Silicon Valley will see an opportunity to to promote alternative fintech solutions by wresting control of global payment networks. In each case, attempts to upend the existing framework will surely cause more problems than they solve. As the US erodes an international system that is structured in its favor, it risks deepening its condition of imperial decline. The future monetary order that it is now imposing upon all of us will come with some buyer’s remorse.