The End of Exorbitant Privilege: Inflation, the Global Dollar and What Comes Next

This year has been rife with anxiety about inflation. Economist Lawrence Summers sent up an early warning flare in March, speculating that debt-financed government coronavirus pandemic relief payments could overheat the economy. Summers got some vindication from consumer price index numbers this summer, including 5.4% annualized CPI growth in June.

Inflation terrifies people for a lot of reasons, including its erosion of the purchasing power of wages and the value of dollar-denominated debt. But in May, a leading foreign exchange trader named Stanley Druckenmiller warned of an even bigger long-term risk of inflation: That it might threaten the U.S. dollar’s status as the world’s dominant “reserve currency.” The U.S. dollar is overwhelmingly the preferred currency for international trade – for instance, the huge global oil trade is dollar denominated and settled. The dollar is also the most widely held foreign currency in central banks. This produces major economic benefits for Americans – what has come to be known as the “exorbitant privilege” of the dollar – and its decline could harm the U.S. economy.

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