The US faces a dilemma of abundance as reserve-currency primacy abroad quietly crowds out production at home
The US labors under a paradox of preeminence: The dollar’s exclusive status as the world’s reserve currency, a structural advantage so durable it has come to feel like destiny.
The ‘exorbitant privilege’ lowers borrowing costs and weakens fiscal discipline, catalyzing chronic budget deficits and propelling public debt onto an exponential trajectory. At the same time, persistent global demand for dollars keeps the exchange rate structurally elevated, undermining exports and entrenching current-account deficits.
These imbalances are financed, with disarming ease, through foreign absorption of US assets that entrench latent yet binding leverage over the American economy. In the process, they conjure a reassuring but ultimately illusory sense of equilibrium.
The deceptive accommodation operates not as a pendulum but as a ratchet turning in only one direction. Its effect is to conceal the cumulative reallocation of productive capacity in the US away from tradable industries and toward finance and consumption.
This trend reveals that America’s monetary primacy amounts less to a costless, salubrious windfall than to an insidious, long-running variant of Dutch disease, masked by the veneer of exceptional and ostensibly unassailable prowess. Economic history, cursorily consulted, places this pattern in sharper relief.
The logic of Dutch disease: How narrow success breeds broad failure
‘Dutch disease’ is the counterintuitive economic pathology whereby a putatively auspicious development, such as the discovery of vast natural resources, insensibly erodes an economy’s productive foundations.
Coined in the wake of the Netherlands’ gas bonanza in the 1960s, the term designates the dynamic whereby windfall revenues draw investment and labor into a booming sector and, by elevating demand for the domestic currency, induce a real exchange rate appreciation that undermines the competitiveness of other tradable industries.
From a political-economy perspective, the concentration of resource rents (excess returns beyond normal market profits derived from ownership of natural resources rather than diversified productive activity) and fiscal reliance on them reorient incentives toward their extraction and distribution rather than productive diversification.
Rent allocation yields immediate and visible political payoffs. Diversification, by contrast, demands widely dispersed and slow-maturing investment that lacks a concentrated constituency, rendering it politically riskier. This asymmetry in political incentives entrenches dependence on a single, volatile source of income across the broader economy.
The Dutch case reads like an economic morality play, a cautionary tale about how prosperity can almost imperceptibly undermine itself. Following the 1959 discovery of the Groningen natural gas field, the Netherlands enjoyed a surge in export revenues. This windfall drove up the guilder to the detriment of manufacturing exports, gradually hollowing out significant segments of the country’s industrial base. What appeared to be a clean win – easy money from beneath the soil – distorted incentives across the economy.
As government revenues grew apace and the energy sector expanded, labor and capital gravitated toward the booming energy industry and sheltered domains of the economy. In their shadow, productive enterprises in traditional industries that once anchored the export economy fought for survival amid a sudden deterioration in cost competitiveness. A great many of them responded with sweeping layoffs only to vanish altogether. Long-term investment was crowded out even as headline indicators continued to suggest sustained prosperity.
Buoyed by gas revenues, the Dutch authorities construed the country’s improved macroeconomic position as indicative of durable fiscal space. Acting on this assessment, they embraced a more expansionary fiscal stance that manifested itself in rising public-sector wages and transfers and ultimately led to widening budget deficits.
By the late 1960s and early 1970s, policymakers had come to recognize that the gas boom had not merely augmented national wealth but had reconfigured the economy in ways that weakened its industrial core. The irony was sharp: Even robust institutions and a once broadly based, competitive industrial structure afforded the Netherlands no immunity against the deleterious structural side effects of its own success.
The episode became paradigmatic insofar as it transformed an exogenous resource-sector revenue shock into a canonical case of structural imbalance across organized systems. In essence, it revealed a general dynamic: Sudden windfalls can weaken rather than strengthen societies, economies, institutions, or related structures.
Even well-governed, advanced systems can falter when sudden, concentrated gains – financial, technological, geopolitical, or otherwise – distort informational signals and skew policy incentives. Over time, these misalignments weaken discipline, foster strategic myopia, and divert resources from their most productive uses. In this context, short-term gains crowd out patient, productivity-enhancing investment, gradually undermining long-term competitiveness. When favorable conditions cease to obtain, the underlying fragility is exposed.
At its core, Dutch disease represents the economic mechanism through which windfall wealth gives rise to the broader paradox of plenty, the governance dilemma posed by abundance. The windfall itself is a ‘good problem’, yet it may turn corrosive when prosperity relaxes constraints across an organized system.
The dilemma can be addressed through judicious strategic and organizational measures. In the sphere of economics, this entails active industrial policy (including strategic support for tradable industries), anchored by prudential fiscal institutions (such as sovereign wealth funds).
A traveling malady: Dutch disease around the world
Dutch disease, despite its name, is less a curious Dutch anomaly than a persistent global tendency to stumble over sudden riches. It is a recurring historical pattern whereby concentrated success, across a broad spectrum of manifestations, disrupts systemic equilibrium, as windfalls foster a rent-dependent political economy by elevating currencies, pricing manufacturing out of global markets, and weakening incentives for structural upgrading.
Spain’s 16th-century influx of New World silver fueled sustained inflation and imperial overstretch while eroding domestic productive capacity; Australia’s 19th-century gold rushes propelled wages and prices upward, undermining nascent manufacturing; oil expansions over the course of the 20th century reshaped Kuwait, Nigeria, and Venezuela by exerting upward pressure on the real exchange rate, entrenching fiscal reliance on resource rents, and magnifying exposure to commodity-price volatility.
Or consider Nauru, a tiny Pacific island nation, whose phosphate boom over the course of the 20th century eventually elevated it to extraordinary per-capita wealth in the 1970s and early 1980s, before resource depletion and fiscal mismanagement reduced it, within a generation, to acute economic vulnerability.
Even well-governed states were not immune: North Sea oil altered industrial incentives in Norway and the UK between the 1970s and 1990s, exerting upward pressure on wages and the real exchange rate and undermining the competitiveness of tradable sectors.
The UK’s post-1986 financial boom fostered a metropolitan variant of Dutch disease, spatially concentrating capital and talent in London at the expense of manufacturing regions in the Midlands and the North. Across the Atlantic, tech wealth in the San Francisco Bay Area likewise inflated costs and displaced alternative industries.
More recent manifestations of the resource curse, understood either in a narrow or broad sense, are structurally analogous: Booming oil and base-metal exports lifting Canada’s dollar amid the commodity supercycle of the early 2000s; mineral price surges driving mining-led expansion in Chile and Australia during the 2000s and early 2010s; post-disaster aid inflows igniting inflation in parts of Asia following the 2004 Indian Ocean tsunami; or a single corporate champion, pharmaceutical leader Novo Nordisk, exerting an outsized influence on Danish growth in the 2010s and 2020s.
Across centuries and continents, the pattern has kept mutating, but the logic of unintended consequences has remained constant: Concentrated prosperity, whatever its source, has repeatedly destabilized systemic balance by elevating costs, narrowing productive breadth, and reorienting incentives toward managing windfalls rather than transcending them.
The structural paradigm of ambivalent abundance offers enduring lessons: When prosperity narrows rather than broadens an economy, today’s windfall matures into tomorrow’s constraint; when a dominant source of income assumes disproportionate weight, it crowds out the rest.
In practice, resource dependence is often associated with subdued growth, elevated volatility, and progressive institutional decay. Unless windfalls are used to discipline and diversify the economy, what begins as a blessing may culminate in slow, self-inflicted decline.
Dutch Disease transposed: Dollar primacy and industrial erosion
Though the particulars differ, the global dominance of the US dollar can be diagnosed as a contemporary manifestation of Dutch disease, the pathology of mismanaged abundance – writ large yet operating in slow motion; less spectacular than an unexpected resource boom but no less consequential.
The dollar’s ‘exorbitant privilege’ as the world’s reserve currency has been both the keystone of financial primacy and a source of structural strain, buttressing financial dominance even as it has gradually eroded the nation’s productive base, structurally compromising it in the process.
Broadly conceived, industrial hollowing-out – the Dutch disease-style side effect of dollar supremacy – does not amount to the extinction of factories: America, after all, has not stopped making things. Rather, it constitutes a structural shift marked by the thinning of manufacturing’s systemic presence.
Properly understood, industrial hollowing-out, then, is not about making fewer goods; it is about producing a smaller share of what the economy must be capable of producing to meet strategic demands in a rapidly shifting geoeconomic landscape.
Within the wider US economy, manufacturing lost economic weight, ecosystem density, and strategic centrality, even as productivity rose. In particular, employment in manufacturing contracted, the sector’s share of national income decreased, domestic supply chains fragmented, and tradable capacity narrowed. The mechanism of degradation is insidious: Gradual, structural, and cumulative.
Because the world demands dollars and US financial assets, large volumes of foreign capital continually flow into the US. That additional demand exerts sustained upward pressure on the real exchange rate, elevating it above the level consistent with underlying real-economy trade fundamentals in the absence of persistent reserve-asset demand.
The appreciated currency, in turn, erodes export competitiveness and amplifies import penetration, disadvantaging not only exporters but also domestically oriented industries exposed to foreign competition. Over time, this exchange-rate bias gradually hollows out core segments of the productive economy, narrowing its systemic weight and strategic breadth.
Viewed through a political-economy lens, the fiscal latitude created by inexpensive borrowing and sustained foreign demand for US liabilities reconfigures incentives. It privileges the extraction and distribution of balance-sheet rents – excess returns derived from structural financial advantages and asset revaluation rather than from productivity-enhancing investment. It likewise tilts policy toward the support of asset prices whose sustained elevation has acquired heightened systemic and electoral significance under conditions of dollar dominance.
This dynamic does not imply deliberate asset-price targeting so much as a risk asymmetry: As financial markets deepen and credit expands, household wealth becomes increasingly asset-dependent, rendering asset valuations progressively more integral to economic stability.
In such a configuration, the penalties for insufficient stabilization are immediate and concentrated, while the costs of excessive accommodation are deferred and diffuse. Asset-price support yields immediate and visible political payoffs; diversification, by contrast, demands widely dispersed, long-horizon, and politically riskier adjustment.
Policymakers therefore face strong incentives to avoid prolonged market downturns, elevating financial stabilization over longer-term industrial rebalancing; structural reform accordingly recedes in priority. In the US, this incentive misalignment, anchored in dollar primacy, has both fostered and perpetuated the erosion of productive capacity.
Clinically, the US strain of Dutch disease has proven distinctly virulent, producing profound systemic consequences. This assessment is borne out by the empirical record, which reveals the remarkable breadth and depth of America’s industrial hollowing out.
[Part 4 of a series on the global dollar. To be continued. Previous columns in the series:
