Will US debt erode the dollar’s reserve-currency status even further?

The US national debt has now crossed the extraordinary threshold of $40 trillion. It doubled in less than a decade, while interest payments on that debt have become one of Washington’s largest expenditures. The milestone itself does not mean that the dollar is about to lose its position as the world’s reserve currency. But it does raise a much more important question: is the US gradually consuming one of its greatest strategic advantages — the world’s confidence in the dollar? (Reuters)

For the moment, the answer is still largely no, despite China’s feverish attempts. The dollar remains overwhelmingly dominant in international finance. According to the IMF, dollar-denominated assets represented about 57% of global official foreign-exchange reserves in the first quarter of 2026. The euro is a distant second. There is also no obvious replacement. China’s renminbi is constrained by capital controls and limited convertibility, while the euro lacks the depth of a unified European fiscal and capital market comparable to the US Treasury market.

But reserve-currency status is not binary. The dollar does not have to collapse for the United States to lose some of the enormous economic benefits it derives from its position. A gradual diversification by central banks, sovereign wealth funds, corporations and investors is enough to make US borrowing more expensive and to reduce the so-called “exorbitant privilege” that allows America to finance itself more cheaply than almost any other country. This is actually happening now. A sign on the wall is that investments in gold surpassed recently the amounts invested in US Treasury bonds.

This is where $40 trillion becomes significant. The danger is not the absolute number. The United States is a huge economy, and its debt is denominated in its own currency. The danger is the combination of persistent deficits, rapidly rising interest costs, political unwillingness to address the underlying imbalance and investors demanding a structurally higher risk premium for holding long-term US government debt. Thirty-year Treasury yields have already moved towards levels not seen for decades. (The Washington Post)

In the short term, higher debt does not necessarily mean less innovation. Quite the opposite can happen. Government borrowing can finance infrastructure, defense, research, AI, semiconductor production, energy and other investments that strengthen America’s technological position. The United States has historically demonstrated an extraordinary capacity to turn government-funded research and private capital into globally dominant companies. If borrowing finances productive investment, debt can support rather than undermine growth.

The problem comes when an increasing share of government revenue is absorbed by interest payments and politically difficult entitlement programs. Every dollar spent servicing old debt is a dollar that cannot be spent on education, infrastructure, basic research, defense or new technologies. Eventually, the government may face the unpleasant choice between higher taxes, lower spending, higher inflation or still more borrowing.

The long-term innovation risk is therefore less about a sudden lack of money and more about fiscal crowding-out. If Treasury borrowing keeps pushing up the cost of capital, private companies may face higher financing costs. Venture capital, housing, infrastructure and corporate investment can all become more expensive. America could remain technologically innovative while becoming less economically efficient.

There is also a geopolitical dimension. The dollar is not merely a currency. It is part of the infrastructure of American power. Dollar dominance gives Washington extraordinary financial leverage through sanctions, payment systems and access to global capital markets. It also makes it easier for the US to finance military expenditures. If countries increasingly diversify away from dollar assets, that leverage weakens significantly.

That could have profound consequences for war and international stability. A less dollar-centric world would probably not become peaceful simply because the dollar is weaker. It could become more fragmented. China, Europe, India, the Gulf states and other powers could increasingly develop parallel financial systems. International trade could become divided into competing currency and geopolitical blocs. Countries might hold more gold, euros, renminbi and other currencies, while bilateral trade increasingly bypasses the dollar.

Paradoxically, that could also make military conflict more dangerous. A fragmented financial system reduces the effectiveness of economic sanctions and makes it harder for one dominant power to impose financial discipline on aggressors. At the same time, declining economic interdependence can reduce some of the costs of geopolitical confrontation.

There is an even more uncomfortable domestic consequence. Fiscal deterioration can intensify political polarisation. Once debt service becomes a large part of the federal budget, virtually every spending decision becomes a distributional conflict. Republicans and Democrats can increasingly fight not only over taxes and social programmes, but over who should bear the cost of decades of accumulated borrowing. That can make already difficult political compromises even harder.

So will US debt destroy the dollar’s reserve-currency status? Probably not. At least not by itself. The bigger risk is a slow erosion rather than a dramatic collapse. The dollar could remain the world’s number-one reserve currency for decades while its share of global reserves, international payments and cross-border finance gradually declines.

And that may actually be the most important scenario to watch.

The US does not need to lose the dollar’s reserve status for the consequences to become significant. If investors conclude that American fiscal policy is becoming structurally unreliable, the privilege of issuing the world’s dominant reserve asset can become progressively more expensive. Higher interest rates, slower potential growth, reduced fiscal flexibility and weaker geopolitical leverage could then reinforce each other.

The extraordinary strength of the American system has always rested on more than the dollar. It rests on deep capital markets, technological leadership, entrepreneurship, military power, the rule of law and institutional credibility. The real question is therefore not whether $40 trillion is too much debt. It is whether the US can continue to convince the world that its institutions and economy will remain strong enough to make that debt trustworthy.

If the answer remains yes, the dollar may survive another generation of extraordinary borrowing.

If the answer gradually becomes no, the consequences will extend far beyond foreign-exchange markets. They could reshape innovation, economic growth, political stability, international trade — and ultimately the balance of power itself. It could lead us faster than anticipated to an inflection point in which a global power vacuum is created, which screams to be filled once again. Potentially dangerous times.