U.S. Hegemonic Drive: The Riptide Effect - Part 1
- Ushma Zunzavadiya
- Aug 11
- 12 min read
“Man is an animal that make bargains: no other animal does it – no dog exchanges bones with another” - this quote by Adam Smith reflects the inherent nature of humans to exchange, negotiate and bargain for their mutual benefit. They form the basis of human civilization and its evolution by way of industrial revolution, globalisation and technological advancement never imagined before.
Global trade revolutionized after the invention of cargo ships centuries ago and nations prospered with their open economic, liberalised policies underpinned on mutual benefits. The exchange of goods, services, labour, capital and technology transformed the global economy into an inter-dependent, inter-connected ecosystem. Any disorder to this complex web of multiple eco-systems would cause an imbalance leading the economies to readjust at a cost.
Recent global events, namely US tariff wars, reflect divergence from mutually beneficial trade policies, underlining a declining willingness to negotiate and bargain. Here, I draw insight from Marx’s theory called “Dialectical Materialism” - when opposite forces interact with each other, such interaction might lead to struggles and conflict. When they are resolved, it leads to progress. Thus, resolution and finding a common ground is essential for global development. While Smith emphasizes co-operation, Marx’s dialectical lens reminds us that when co-operation often breaks down when competing interests collide, leading to structural shifts – exactly what we see in U.S protectionist policies today.
U.S today faces a host of economic challenges - burgeoning debt, widening fiscal deficit, high interest rates, the political dichotomy and protectionist policies of the U.S - threatening the stability of the global system and order. The global economy needs a stable, safe currency with enough liquidity for global trade. Over a period of time, U.S is gradually losing confidence of global system. The volatility of US policies, the world’s dependency on greenback and its use as instrument for sanctions has further exacerbated the need to move away from U.S Dollar – to de-couple, de-risk and diversify.
This note is first instalment in a two-part series examining shifting foundations of global order. Part 1 focuses exclusively on U.S economic pressures – its fiscal health, debt sustainability, monetary policy, and trust that anchors the U.S dollar’s reserve currency status. These structural conditions shape U.S trade policies, negotiations and response to global shocks. Part 2 focuses on the strategic use of oil and gas – not only as commodities but instruments of sanctions – to explore how energy markets intersect and reinforce U.S power in the international system.
Rise of U.S. economic hegemony
The U.S. emerged as the richest and powerful nation post 1940s. As other leading nations declined in the aftermath of World War – II, USA’s share in the global trade became one of largest, with exports fuelling the economy. As a result, its economy witnessed a boom with large domestic savings in the form of gold and money. Its dominance in trade, its military and financial prowess made it a global super-power. U.S. Dollar achieved its reserve currency status capturing largest share in global transactions and foreign exchange reserves. This positioned U.S. Dollar– as a safe-haven asset, store for wealth in alternative to gold.
Trust and U.S Dollar’s reserve currency status
There is one foundational aspect to US dollar’s hegemony – trust. The stability in the U.S economy, the government and policies drive the faith in the greenback and its global attractiveness. Instability in these factors, political polarisation and debt-ceiling crisis would cause the trust in the system to reduce, reflecting in the global holding of USD-denominated assets and consequently in the value of US Dollar.
Over a period of time, the structural change in the economy driven by recessionary periods, response to shocks, geopolitical conflicts, has reshaped the distribution of global reserves. Each downturn has not only disrupted trade flows, often moving away marginally from the U.S Dollar towards other assets. These adjustments, although small in short term, have compounded over decades to gradually erode the US Dollar’s once challenged share in global system.
Figure 1 shows the US Dollar’s dominant share in the global foreign exchange reserves. Over last two decades, USD share fell from 70% in 1999 to 58% in 2023, CNY rose from 0% to 3%.
Below Figure 2 compares the share of U.S Dollar, euro and Chinese renminbi in the global trade settlements with their respective shares in GDP and trade. U.S Dollar remains dominant, far exceeding U.S proportional share of global output. Euro holds second position, with international usage roughly in line with its share in GDP. In contrast, Chinese renminbi underrepresents in international transactions relative to its large and growing share in global GDP and trade. This gap suggests entrenched position of U.S Dollar and potential for change, as China’s economic weight continues to expand and its push for greater internationalisation could challenge the dollar’s share in the future.
Figure 3 charts the U.S. Dollar Index (DXY) over multiple decades, capturing the currency’s performance against a basket of major trading partner currencies. While short-term spikes occur during periods of global uncertainty — such as the 2008 financial crisis and the early stages of the 2020 pandemic — the longer-term trend reflects a gradual erosion in value. This decline mirrors the interplay of cyclical factors, including interest rate cycles and capital flows, and structural headwinds such as persistent fiscal deficits, rising debt levels, and growing competition from alternative currencies. Temporary rebounds during safe-haven flights have been outweighed over time by these structural pressures, underlining the risks to the dollar’s future supremacy.
Fiscal Deficits: Cyclical vs structural pressures
Every government finances its growth programs through the income from taxes and other sources. When the income is insufficient to cover the expenditures, it leads to a shortfall. To keep the economy on pace, one needs to spend. As the shortfall grows, one need to curtail expenses or increase the income. Curtailment of government expenditure or increase in income through taxes could hinder economic growth. Alternatively, government borrows to fund the deficit (shortfall) while keeping taxes lower and continuing to spend. While the propulsion of credit in an economy boosts the spending power of an economy, it also increases the debt burden of the economy. When additional income on account of borrowed money is sufficient to cover the debt service cost, it indicates the economy is doing well and is net productive. Conversely, when the borrowings cannot generate sufficient additional income, the economy cannot service the debt cost, leading to widening of fiscal deficit and adding more debt.
Figure 4 shows federal fiscal deficit trend from 1980 – date. With increased spending in last two decades, the fiscal deficit has widened from $73B to $1.83T in 2024 registering income of $4.92T and expenditure of $6.75T. In 2025, the gap has widened to more than $2T.
It is pertinent to note the sudden spikes in the deficit followed the recessionary periods (indicated by shade region) such as – dotcom bubble, 2008 GFC crisis, 2020 pandemic. In the event of economic downturns, counter-cyclical measures like expansionary policies are introduced to revive the economy. These measures focused on government spending (fiscal) and credit creation (monetary) are meant to bring a net productive effect in economy in the long run i.e. GDP increase > deficit increase.
Comparing the deficit trend in relation to GDP, the deficit to GDP ratio rose to 6.28% in 2024 as depicted in Figure 5. This suggests that the denominator (GDP) growth has not outnumbered the increase in numerator (deficit), pushing the ratio upwards. Elevated fiscal deficit during recessionary periods of 2008 and 2020 was a consequence of declining economic output and discretionary fiscal measures. A deficit of 6.28% is historically large for a non-recessionary period with robust GDP growth, indicating non-cyclical factors at play – involving structural entitlement spending, defence spending, tax policy rigidity, political gridlock.
Debt levels and their global impact
As the fiscal deficit widened, the federal debt burden mounted. The US debt levels have hit an all-time high of $36.8T as of August 2025, 123% of the GDP – its highest in modern history. Figure 6 illustrates the multi-decade trend of rise in U.S. economic output outpacing the rise in debt. Since 2013, the debt has been growing faster than the GDP elevating the debt-to-GDP ratio above 100% and to highest levels of 120%. The debt to GDP ratio measures the government’s ability to repay its debt. Persistent gap between revenue and outlays have pushed the debt to historic levels and can crowd out private investment and push the fiscal burdens onto future generations.
Out of the total debt, public debt was $28.8T which is 98% of GDP and intra governmental debt was $7.3T representing government’s retirements funds. The major holders of public debt include banks and institutions, foreign governments, and investors. Over decades, there has been a steep rise in the public debt, whereas the intragovernmental debt has seen a steady rise. This expanding of debt is attributed to the recessionary periods of 2000, 2008 and 2020, reduction of corporate taxes in 2016-17 and increased expenditure in an inflationary and high-interest rate environment since 2022.
Such elevated leverage levels limit the flexibility in responding to future shocks. As interest consumes a growing share of federal revenue, discretionary spending for crisis response shrinks, limiting the U.S.’s ability to project power or stimulate growth during downturns. They also place greater reliance on favourable borrowing conditions, meaning any sustained rise in interest rates could quickly escalate the debt service burden. For foreign creditors, this raises questions about the long-term sustainability of U.S. fiscal policy, encouraging diversification away from U.S. Treasuries. The foreign holdings of U.S treasuries has decreased from 35% in Dec 2020 to 30% in Dec 2024 as charted in Figure 7.
The cost of High Interest Rates
The U.S interest rates have stayed elevated at 4.25-4.50% on account of persistent inflation caused by energy inflation due to Russia-Ukraine conflict, stimulus measures in 2020 and tight U.S labour markets. Below Figure 8 depicts interest rate cycles between 2000 and 2025. The period of ultra-low interest rates during 2008-2016, 2020-2022 enlarged the debt burden and Fed’s balance sheet backed by stimulus packages to revive the economy from recessionary pressures.
As the rates remain higher, it poses risks to the debt-service ability of the federal government. The higher interest rates and high debt levels have pushed the interest payments to substantial levels from $517 billion in 2020 to $1.13 trillion in 2025, a 100% increase in 5 years. 75% of the interest outlays is towards public holdings due to their proportionate larger holdings. This translates to a significant ~3% of the GDP, a large opportunity cost for the nation as these funds could have been used for productive spendings on education, healthcare. Figure 9 depicts a significant rise in the interest payments over two decades, with 100% increase between 2020 and 2025 from $517 billion in to $1.13 trillion.
While the government seeks an immediate steep relief by lowering interest rates, the U.S central bank has kept the rates steady at 4.25%-4.50% in July 2025 and has not indicated a rate cut in September. As the central bank functions independently of the government, the interest rate decisions must be guided by economic drivers of employment and inflation, irrespective of the government’s shifts.
The interest rates in 2024, 2025 have been steady for a longer duration than that projected before, due to persistently tighter labour markets and strong economic output. In Q1 of 2025, US grew at an annualised rate of robust 3%. However, in coming months, labour markets might soften in coming months once the impact of protectionist policies of U.S (tariffs) and deportations are felt by the economy.
Understanding the inter-play of deficit and debt, profit (surplus) earned by a business is invested into business for future growth (GDP). As the return on money invested multiplies, the business flourishes like a money compounding machine. The credit driven growth yield benefits till the total revenue covers the expenditure and the debt service cost. In simpler terms, the marginal benefits accruing on account of marginal debt should be able to cover at least debt service cost. This servicing cost is also a function of interest rates. In case of higher interest rate, the debt service cost goes up and it makes it difficult to manage the account. In contrast, if a business incurs repetitive losses, its runs on savings and the borrowings increase. In absence of profits, maturing debt is funded by new debt. This cycle continues until the business cannot raise fresh capital or cannot serve its existing obligations.
Managing Debt: Tools and Risks
US Debt Ceiling limits
The US debt ceiling limit is a legislative limit on the amount of money the federal government can borrow. This limit was reinstated at $36.1T in January 2025, following suspension in 2023. In order to pay its national bills, the government has to borrow. Unless the limit is revised upwards or suspended, the government cannot borrow to fulfil its obligations, failure to which would cause the government to default.
Since the reinstatement in January 2025, the debt levels have already crossed ceiling limits therefore requiring extraordinary measures. These measures are estimated to exhaust in August – September 2025, pushing the U.S economy again towards the ‘debt ceiling crisis’. Legislation to this effect is in progress with an upward revision of $4T for fulfilment of existing obligations. As a matter of fact, since 1960, the limits have been revised 78 times.
The concept of debt ceiling limit was introduced in U.S legislation after World War 1 to allow a flexibility in borrowing, which has now taken the form of a political bargaining chip. Uncertainty around the decision, often causes volatility in the capital markets, spike in the US bond yields – to this, 2011 standoff is a suitable case study. The unsustainable debt limits led to U.S. downgrade from ‘AAA’ to ‘Aa1’ by Moody’s in 2025 following Fitch in 2023, and S&P in 2011 around the debt ceiling crisis.
Depreciation of US Dollar
The US Dollar value is determined by demand and supply of U.S. Dollar in the global financial markets. As the supply increases, the value declines and the rise in demand increases the value. Practically, when US implements expansionary monetary policies through lowering rates and quantitative easing (money printing), the value declines. As the economy raises the interest rates, the value rises.
In the long run, the dollar’s value also reflects its demand in the global economy. For a country who borrows in foreign currency need to serve the obligations in that currency and is exposed to the fluctuations in the value and rates of currency.
U.S. debt denominated in its domestic currency, it can reduce the burden by devaluing the currency. As the currency’s value declines, the debt becomes cheaper to serve. U.S. Dollar is a freely floating currency, so this could be achieved by expansionary measures – by lowering interest rates or any extraordinary measures like printing of money. Depreciation / devaluation also makes the currency attractive in the global export markets, boosting the export potential. Historically, the 1971 Nixon shock that ended gold convertibility led to US Dollar depreciation and that eased the debt burden.
Diversification from the Dollar
Across the global markets, the greenback remains dominant in FX volumes and trade invoicing, while its share in global output has declined. De-dollarisation is unfolding in FX reserves as already discussed in Figures 1-2. Rise of alternate assets like cryptocurrencies, high gold prices projects diversification towards other safe-haven assets. The commodity markets are visibly moving away from the dollar, where growing proportion of oil and gas transactions are denominated in non-dollar currencies.
BRICS countries – constituting around 40% of global GDP and major consumers of oil and gas - are actively exploring alternate currencies in order to reduce reliance on U.S. Dollar for international trade and finance. These involves promoting use of national currencies in trade, developing alternative payments systems, and potentially creating a common BRICS currency. The expansion of BRICS, coupled with the above moves suggests emergence of multi-polar power, directly challenging the US dollar’s dominance. EU is also looking to diversify its strategic and economic partnerships in multi-polar world by expanding and improving their ties with BRICS countries and global south.
In the bond markets, the foreign holdings of U.S. treasuries have declined as major foreign holders have offloaded their holdings significantly. As fiscal pressures mount, foreign investors have re-assessed their exposure to U.S assets – a shift over time, could erode the very foundation of dollar’s dominance.
Figure 10 shows significant drop in Japan and China’s (Top 2 foreign investors) exposure to U.S. Treasuries marking declining confidence in US debt due to growing risk.
De-dollarisation could shift the balance of power among the nations, which could re-shape the global economy and markets. The weakening of reserve currency status suggests approaching decline of an empire as evident from the historical examples of imperial Dutch Guilder and British Pound. After ~200 years of dominance of trade, wealth and power, the Dutch were replaced by the British for ~100 years, who in turn, were replaced by U.S. for the last 80 years. Commonly, their rise and fall was guided by dominant share in global output, reserve currency status, high debt, printing of money, political polarisation, devaluation of currency, resultant loss of confidence in currency and sale of debt – leading towards loss of reserve currency status marking the last leg of empire’s decline.
As the economic and political foundations of U.S. are under strain, it turns increasingly to other levers of influence to maintain its dominance. Chief among these is energy — particularly oil and gas — which has been a pillar of U.S. geopolitical strategy. My next instalment to this series focuses on how energy markets are instrumentalized through sanctions, pricing strategies, control over supply chain to preserve, and perhaps re-define U.S. hegemony. These policies represent the thesis-antithesis cycle Marx described — with protectionism as the thesis and globalisation as the antithesis, their eventual synthesis will define the next trade order.
By Ushma Zunzavadiya
References:
https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
https://www.jpmorgan.com/insights/global-research/currencies/de-dollarization
https://www.ft.com/content/859aa386-cdc9-49df-befb-0aca19fda33c
https://www.europarl.europa.eu/RegData/etudes/BRIE/2024/760368/EPRS_BRI(2024)760368_EN.pdf
US Economic data extracted from U.S. Department of the Treasury, Federal Reserve Bank of St. Louis, U.S. Bureau of Economic Analysis.
The book ‘Changing World Order’ by Ray Dalio