Unraveling Layers of Being

At home I was taught that I should avoid debt, produce more than I consumes, and balance my budget responsibly. So, it may come as surprise to many that the United States, the most powerful economy in the world, has done the opposite for over 50 years… and became more powerful because of it.

This did not start with a collapse. Rather, it started with a strategic move. And it explains why the U.S. is so nervous about China today.

1971: The End of the Gold Standard

Until 1971, the U.S. Dollar was backed by gold. Under the post WWII Bretton Woods system. Established in 1944, it relied on the trust in the United States to back the dollar with gold. The dollar was pegged at $35 per ounce of gold, and other currencies were pegged to the dollar. This created a stable global financial system, but one with limits. The United States could not print unlimited money because every dollar had to be redeemable for gold.

That changed on August 15, 1971, when Nixon announced the U.S. would no longer honor the dollar’s convertibility into gold. This move was known was the Nixon shock. This truly shook the world as it broke a global agreement.

This was a strategic pivot that gave the United States full monetary sovereignty.

Run Deficits -> Rule the World

After the 1971, the United States embraced a new bold strategy: run trade deficits, import more than it exports, and pay for it with U.S. dollars. Even after the gold standard ended, most global trade, specifically in commodities like oil, was still conducted in dollars. Other countries had to accept it because they needed to function, and the dollar remained the global reserve currency. Eventually, they had to accept the U.S.’s debt in the form of dollars.

Even more remarkably, those dollars did not just sit there. After WWII, countries like Japan and Germany rebuild their economies through exports and the United States was the largest consumer market in the world. When they imported something, it would pay back in dollars.

But these countries would not exchange the dollars earned in their local currency because that would drive the currency value up making exports more expensive. So, Japan and Germany would then reinvest their dollar earnings back into the United States assets by buying bonds, stocks, real estate. The U.S. was sending dollars abroad in exchange for real goods, and then those dollars would return as loans back into the U.S. financial system.

China Comes Into the Picture

In the 1980s and 90s, the U.S. began outsourcing manufacturing to China and getting paid in dollars. It was an opportunity for American corporations to get cheap labor and thus huge profits. Washington believed it could retain control over technology, design, and finance with China doing all the dirty work.

But China being China, played a long game. It exported more than it imported, so it used trade surpluses to build up its reserves. It saved massive stockpile of U.S. Treasuries. At its peak, China held over $1.3 trillion in U.S. Treasury bonds, acting as one of America’s biggest creditors.

Having dollars on reserve, they did not need to worry about borrowing. China invested heavily in infrastructure, tech zones, education, and gradually moved up the value chain.

Why the U.S. Is Worried Now

This whole system only works if the dollar remains as the world’s reserve currency.

Today, that dominance is being challenged. We see that in the BRICS. Countries like China, Russia, and even Brazil are beginning to trade in other currencies. The petrodollar system, where oil is priced in dollars, is under threat. Some countries are calling for multipolar currency world, with more financial autonomy and less dependence on the United States.

That would mean the United States would no longer keep printing and borrowing freely. If there is less demand for U.S. debt, there is a potential decline in its geopolitical power.

This is why the United States appears increasingly anxious about China’s rise, not just economically or militarily, but in currency, trade, and global influence.

The Future

The U.S. built a financial empire on the trust in the dollar. For decades it ran massive deficits. It knew that other countries would absorb those dollars and reinvest them. It was a brilliant, yet fragile system.

Now, as more cracks appear, what will happen if the world stops trusting U.S. IOUs?