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DominantanddangerousAsAmerica'seconomicsupremacyfades,theprimacyofthedollarlooksunsustainableIFHEGEMONSaregoodforanything,itisforconferringstabilityonthesystemstheydominate.For70yearsthedollarhasbeenthesuperpowerofthefinancialandmonetarysystem.Despitetalkoftheyuan'srise,theprimacyofthegreenbackisunchallenged.Asameansofpayment,astoreofvalueandareserveasset,nothingcantouchit.Yetthedollar'srulehasbrittlefoundations,andthesystemitunderpinsisunstable.Worse,thealternativereservecurrenciesareflawed.Atransitiontoamoresecureorderwillbedevilishlyhard.WhenthebuckstopsFordecades,America'seconomicmightlegitimisedthedollar'sclaimstoreignsupreme.But,asourspecialreportthisweekexplains,afaultlinehasopenedbetweenAmerica'seconomiccloutanditsfinancialmuscle.TheUnitedStatesaccountsfor23%ofglobalGDPand12%ofmerchandisetrade.Yetabout60%oftheworld'soutput,andasimilarshareoftheplanet'speople,liewithinadefactodollarzone,inwhichcurrenciesarepeggedtothedollarormoveinsomesympathywithit.Americanfirms'shareofthestockofinternationalcorporateinvestmenthasfallenfrom39%in1999to24%today.ButWallStreetsetstherhythmofmarketsgloballymorethaniteverdid.Americanfundmanagersrun55%oftheworld'sassetsundermanagement,upfrom44%adecadeago.ThewideninggapbetweenAmerica'seconomicandfinancialpowercreatesproblemsforothercountries,inthedollarzoneandbeyond.Thatisbecausethecostsofdollardominancearestartingtooutweighthebenefits.First,economiesmustendurewildgyrations.InrecentmonthstheprospectofevenatinyrateriseinAmericahassuckedcapitalfromemergingmarkets,batteringcurrenciesandshareprices.DecisionsoftheFederalReserveaffectoffshoredollardebtsanddepositsworthabout$9trillion.Becausesomecountrieslinktheircurrenciestothedollar,theircentralbanksmustreacttotheFed.Foreignersown20-50%oflocal-currencygovernmentbondsinplaceslikeIndonesia,Malaysia,Mexico,SouthAfricaandTurkey:theyaremorelikelytoabandonemergingmarketswhenAmericanratesrise.Atonetimethepainfromcapitaloutflowswouldhavebeenmitigatedbythestrongerdemand—includingforimports—thatpromptedtheFedtoraiseratesinthefirstplace.However,inthepastdecadeAmerica'sshareofglobalmerchandiseimportshasdroppedfrom16%to13%.Americaisthebiggestexportmarketforonly32countries,downfrom44in1994;thefigureforChinahasrisenfromtwoto43.AsysteminwhichtheFeddispensesandtheworldconvulsesisunstable.Asecondproblemisthelackofabackstopfortheoffshoredollarsystemifitfacesacrisis.In2008-09theFedreluctantlycametotherescue,actingasalenderoflastresortbyoffering$1trillionofdollarliquiditytoforeignbanksandcentralbanks.Thesumsinvolvedinafuturecrisiswouldbefarhigher.Theoffshoredollarworldisalmosttwiceaslargeasitwasin2007.Bythe2020sitcouldbeasbigasAmerica'sbankingindustry.Since2008-09,CongresshasgrownwaryoftheFed'semergencylending.Comethenextcrisis,theFed'splanstoissuevastswaplinesmightmeetregulatoryorcongressionalresistance.ForhowlongwillcountriesbereadytotietheirfinancialsystemstoAmerica'sfractiousanddysfunctionalpolitics?Thatquestionisunderscoredbyathirdworry:Americaincreasinglyusesitsfinancialcloutasapoliticaltool.Policymakersandprosecutorsusethedollarpaymentsystemtoassertcontrolnotjustoverwaywardbankersanddodgyfootballofficials,butalsoerrantregimeslikeRussiaandIran.RivalpowersbridleatthisvulnerabilitytoAmericanforeignpolicy.Americansmaywonderwhythismatterstothem.Theydidnotforceanycountrytolinkitscurrencytothedollarorencourageforeignfirmstoissuedollardebt.Butthedollar'soutsizeroledoesaffectAmericans.Itbringsbenefits,notleastcheaperborrowing.Alongsidethe“exorbitantprivilege”ofowningthereservecurrency,however,therearecosts.IftheFedfailstoactaslenderoflastresortinadollarliquiditycrisis,theensuingcollapseabroadwillreboundonAmerica'seconomy.Andevenwithoutacrisis,thedollar'sdominancewillpresentAmericanpolicymakerswithadilemma.Ifforeignerscontinuetoaccumulatereserves,theywilldominatetheTreasurymarketbythe2030s.Tosatisfygrowingforeigndemandforsafedollar-denominatedassets,America'sgovernmentcouldissuemoreTreasuries—addingtoitsdebts.Oritcouldleaveforeignerstobuyupothersecurities—butthatmightleadtoassetbubbles,justasinthemortgageboomofthe2000s.It'sallabouttheBenjaminsIdeallyAmericawouldsharetheburdenwithothercurrencies.Yetifthehegemonyofthedollarisunstable,itswould-besuccessorsareunsuitable.Thebatonoffinancialsuperpowerhasbeenpassedbefore,whenAmericaovertookBritainin1920-45.ButBritainandAmericawereallies,whichmadethetransferorderly.AndAmericacamewithready-madeattributes:adynamiceconomyand,likeBritain,politicalcohesivenessandtheruleoflaw.Comparethatwithtoday'scontendersforreservestatus.Theeuroisacurrencywhoseveryexistencecannotbetakenforgranted.Onlywhentheeuroareahasagreedonafullbankingunionandjointbondissuancewillthosedoubtsbefullylaidtorest.Asfortheyuan,China'sgovernmenthascreatedthemonetaryequivalentofaneight-lanemotorway—avastnetworkofcurrencyswapswithforeigncentralbanks—butthereisnooneonit.UntilChinaopensitsfinancialmarkets,theyuanwillbeonlyabit-player.Anduntilitembracestheruleoflaw,noinvestorwillseeitscurrencyastrulysafe.Allthissuggeststhattheglobalmonetaryandfinancialsys