Two Possible Futures: Scenarios for the Dollar Empire

The American economy has been running on a hidden engine for half a century. Since the early 1970s, the living standards of the typical worker have been maintained not by rising wages, but by accumulating debt. At the same time, the financial sector has ballooned, capturing a wildly disproportionate share of corporate profits. These aren’t separate phenomena—they are interconnected parts of a single system, enabled by the U.S. dollar’s unique role as the world’s reserve currency.

This system, which we can call the Debt-Substitution Empire, has three core components:

1. The Distributional Engine: Since 1979, American workers have received only about 15% of productivity gains. (Economic Policy Institute, State of Working America Data Library, 2021; methodology: BLS productivity data vs. EPI compensation analysis using PCE deflator) The rest—roughly 85%—has been captured by capital owners, top executives, and the financial sector.
2. The Debt Patch: To prevent a collapse in consumer demand (since workers can’t buy what they produce), the system relies on expanding household debt. This “patch” allows living standards to be maintained despite wage stagnation.
3. The Dollar Enabler: The U.S. dollar’s global reserve status is the magic ingredient. It allows America to run massive, permanent trade deficits—importing real goods while exporting paper claims—without facing a traditional balance-of-payments crisis. It lets the Federal Reserve create trillions in credit without immediate currency collapse.

This model explains why GDP growth often feels hollow, why financial crises keep getting bigger, and why wealth inequality soars even during “booms.”

But all systems have limits. The Debt Patch requires ever-growing debt relative to income, a mathematical impossibility. The question is not if this model changes, but how. We stand at a fork in the road, facing two starkly different long-term scenarios. The path we take depends fundamentally on the fate of the dollar’s hegemony.

Scenario A: The Empire Holds—Business as Usual, Until It Isn’t

In this future, the dollar retains its dominant global position. The system’s internal contradictions are managed, not resolved. The ride continues, but it becomes progressively more unstable, unequal, and surreal.

What Continuation Looks Like

• Structural Trade Deficits Persist: The U.S. continues to consume more than it produces, financed by the world’s appetite for dollars. Manufacturing continues its relative decline, while the economy becomes ever more focused on finance, technology, and services.
• The QE Playbook Remains on the Shelf: When crises hit, the Federal Reserve’s first response is large-scale asset purchases (Quantitative Easing). This inflates asset prices (benefiting the wealthy) but does little to spur broad-based wage growth. Each crisis requires a larger dose.
• Financial Sector Dominance Grows: The anomaly identified in our research—where finance earns 25-30% of corporate profits (Bureau of Economic Analysis, NIPA Table 6.16D, Corporate Profits by Industry) while contributing only 7-8% of GDP—persists or worsens. This is a sign of rent extraction, not value creation.

The Distributional Engine Grinds On

The core injustice remains baked in. Workers continue to capture a meager slice of the economic pie they help bake. If the 1979-2019 pattern holds, for every 100 units of productivity growth, the typical worker’s compensation grows by only 15 units. The rest flows upward, reinforcing the power of capital over labor.

The Evolution of the Debt Patch

The patch must constantly find new veins to tap, as old ones are exhausted.

1. Household Debt (1970s-2008): This was the original patch. Mortgages, credit cards, and auto loans ballooned from 25% of GDP in 1958 to a peak of approximately 96% of GDP in Q3 2007 (Federal Reserve Z.1 data, Table D.3).
2. Government Debt (2008-Present): When households could borrow no more in 2008, the government stepped in. Federal debt held by the public surged, effectively substituting public borrowing for private borrowing to keep demand in the economy.
3. The Next Frontier—Student Loans & Beyond: Household debt currently stands at approximately 75% of GDP (Federal Reserve Z.1, most recent data). This represents significant deleveraging from the 2007 peak of 96%, though still far above the 25% level of the 1950s. With government debt at record levels, the system seeks new debtors. The $1.7 trillion student loan portfolio represents a massive transfer of future income from young workers to creditors. Other targets could include expanded consumer credit underwriting or new forms of securitization.

The Internal Contradictions and the Asymptote

This scenario is inherently unstable. The Debt Patch is a Ponzi-like structure: it requires an ever-increasing debt-to-income ratio. But this ratio has a hard, mathematical limit: the borrower’s capacity to service the debt.

We are approaching an asymptotic limit. As combined household and government debt approaches extreme levels (say, 200%, 300%, or 400% of GDP), more and more national income is diverted to interest payments, not consumption or investment. Growth slows to a crawl. Monetary policy loses potency—interest rates are already near zero, and QE primarily fuels asset bubbles.

The system becomes exquisitely fragile. A small rise in interest rates, a minor economic shock, or a dip in asset prices could trigger a cascading default crisis far worse than 2008.

Who Wins and Who Loses in Scenario A?

• Winners: The top 10%, especially the top 1% and 0.1%. Capital owners, top executives, and those in the financial sector profit from asset inflation, high corporate profits, and the interest earned on the nation’s massive debt.
• Losers: The bottom 90%, especially young people and future generations. Workers face stagnant wages, soaring costs for essentials (housing, healthcare, education), and a future burdened by both personal and public debt. They experience growth only through the fragile mechanism of borrowing.

Scenario A is a slow-burn crisis. It looks like stability—no dramatic collapse, just a gradual erosion of living standards, a widening chasm between the rich and the rest, and a financial system that grows ever more detached from the real economy. It continues until it simply can’t.

Scenario B: The Empire Crumbles—The Debt Patch Fails

This is the rupture scenario. The enabling condition of the entire system—dollar hegemony—erodes. When it does, the Debt Patch fails catastrophically, and the hidden distributional deficit of fifty years is exposed all at once.

The Trigger: Dedollarization

The process is already beginning. Motivated by geopolitical rivalry, financial sanctions, and a desire for autonomy, nations are building alternatives to the dollar-centric system.

• BRICS+ and Alternatives: Coalitions like an expanded BRICS are creating trade settlement mechanisms in local currencies.

• Declining Reserve Share: The dollar’s share of global central bank reserves has gradually fallen from over 70% in 2000 to about 58% today (IMF Currency Composition of Official Foreign Exchange Reserves, COFER database). A accelerated decline would be a major warning sign.

  Important context: while the dollar reserve share declined from approximately 65% in 2001 to 59% by 2022, this decline plateaued between 2016 and 2021 before resuming. The trend is real but more gradual than many de-dollarization narratives suggest — making the timing of any tipping point genuinely uncertain.

• Commodity Pricing: Moves to price key commodities (like oil or minerals) in currencies other than the dollar would strike at the heart of its hegemony.

The Transmission Mechanism: The Inflation Constraint Returns

Here’s the critical link. As global demand for dollars falls, the magic trick ends. The U.S. can no longer finance its massive trade deficits so easily. Foreigners become less willing to hold ever-growing piles of U.S. Treasury debt.

The result: the U.S. faces a balance-of-payments constraint like any other country. To fund its imports, it must either export more or see its currency depreciate. A falling dollar makes imports more expensive, importing inflation directly into the U.S. economy.

Suddenly, the Federal Reserve loses its ability to print money without consequence. The “credit without inflation” privilege vanishes. To defend the currency and curb inflation, the Fed would be forced to raise interest rates dramatically, regardless of the domestic economic cost.

What Debt Patch Failure Looks Like

With high interest rates and no easy foreign financing, the debt edifice collapses.

1. Forced Deleveraging: The cost of servicing existing debt—government, corporate, and household—skyrockets. Defaults surge. A fire sale of assets begins as everyone tries to pay down debt simultaneously.
2. Demand Collapse: With credit frozen and households focused on survival, consumer spending plummets. The economy, which has relied on debt-fueled demand for decades, goes into severe recession.
3. Structural Adjustment: The U.S. can no longer consume far more than it produces. It must undergo a painful rebalancing: exports must rise, imports must fall. This means a drastic shift away from consumption and finance toward production and tradable goods. It is a wrenching, decade-long process of de-financialization.

Social and Political Consequences

The social contract would shatter. The promise that each generation would do better than the last—already broken for many—would be openly and violently revoked.

• Political Instability: The legitimacy of institutions would be challenged. Austerity politics, class conflict, and populist movements of all stripes would surge.
• Social Crisis: The safety net, already strained, would be overwhelmed. The disparities built over 50 years would become intolerably visible.

A Historical Analogy: Britain After WWII

The closest parallel is the decline of the British Pound Sterling. After WWII, the pound lost its undisputed reserve currency status to the dollar. Britain faced persistent balance-of-payments crises, was forced to devalue its currency, and endured a long period of relative economic decline and austerity (“the sick man of Europe”). It had to painfully adjust to living within its means, without the privilege of financing deficits with its own currency. The U.S. version of this transition would be orders of magnitude larger and more disruptive.

The Russian Mirror: Life Without the Reserve Currency Privilege

What does an economy look like when it cannot use the Debt Patch to mask the Crisis of Capital Effectiveness (CCE)—the observed tendency for productivity gains to be captured by capital rather than broadly shared with workers? Russia provides a provocative, if imperfect, parallel.

Russia operates without reserve currency status. It cannot run permanent, structural trade deficits financed by printing rubles that the world eagerly holds. So how does it manage?

Our research suggests Russia has developed substitute mechanisms to maintain stability, albeit of a very different kind:

1. Resource Rents as the Primary Engine: Instead of a financial sector extracting rent via debt, the Russian state extracts rent via its control over oil, gas, and minerals. These resource profits tend to flow into state coffers.
2. State-Led Investment and Redistribution: The state uses these rents to fund investment (often in infrastructure and national champions) and to provide social transfers, pensions, and public sector wages. This is a political allocation of surplus, replacing the financialized debt mechanism.
3. A Different Kind of Inequality: Inequality exists, but it may stem more from political access to resource rents and state contracts than from financial market gains. The “CCE” dynamic—workers missing out on productivity gains—might be mitigated by state transfers, but at the cost of economic dynamism and political freedom. One concrete comparison: Russia’s household debt-to-GDP ratio has remained below 25%—compared to the U.S. figure near 75% (Federal Reserve Z.1, most recent quarterly data)—suggesting that without reserve currency status enabling external financing, debt-led consumption cannot reach American scales regardless of other structural pressures.

What This Comparison Teaches Us: The Russian case suggests that the CCE—the gap between productivity and pay—is not an immutable law of nature. It can be patched over by different means. The U.S. uses financialized debt. Russia uses political redistribution of resource rents. Both are arguably inefficient and create their own forms of distortion and corruption.

Crucial Research Remains: We lack the granular data to quantify Russia’s productivity-pay gap over time. Does it mirror the U.S.’s 15% pattern? Or does state intervention alter the equation? Understanding this would tell us whether the CCE is a universal capitalist tendency or a specific outcome of the Anglo-American financialized model. This is precisely where AI-assisted monitoring becomes valuable: systematically tracking cross-country productivity-wage datasets, resource sector profit distributions, and household debt trajectories as they become available—assembling the comparative evidence needed to test the CCE hypothesis across different institutional settings without requiring specialized expertise in each country’s economic statistics.

Conclusion: The Fundamental Choice

These two scenarios present us with more than just forecasts; they reveal the fundamental choice embedded in our economic structure.

Scenario A (Dollar Hegemony Maintained) is the choice to delay. It kicks the can down the road, preserving a system that benefits the few at the expense of the many and of future stability. It accepts increasing financialization, inequality, and fragility as the price of avoiding a sharp break.

Scenario B (Dollar Hegemony Erodes) is the choice, forced upon us by external actors, to adjust. It is a painful reckoning with fifty years of accumulated imbalances. It means finally confronting the distributional deficit—the 72 percentage points of productivity growth not paid to workers since 1979.

The uncomfortable truth is that our celebrated “strong economy” has been, for the typical American, a decades-long illusion financed by debt and enabled by global dollar dominance. The prosperity was real in aggregate GDP terms, but it was captured, not shared.

The coming decade will likely involve elements of both scenarios—a slow erosion of dollar privilege punctuated by crises. But the direction is clear. A system built on an ever-expanding debt patch and a deeply unequal distribution of gains is not sustainable, whether the dollar remains king or not.

The ultimate lesson is that we have mistaken the symptom (economic growth) for the substance (broadly shared prosperity). We have used the unique privilege of the dollar empire to paper over this mistake with debt. That privilege is not eternal. When it fades, we will have to build an economy that stands on a more solid foundation: one where productivity gains are widely shared, where finance serves the real economy rather than parasitizing it, and where growth is measured not just in output, but in the well-being of the people who create it.

The fate of the dollar empire will shape the timing and intensity of the transition. The structural pressures themselves are already visible in the numbers of the last half-century.

For detailed data sources and methodology, see Article 17: Sources and Observations.