The global financial architecture at a crossroads: what does the end of dollar hegemony mean for America?

When in July 2024 the US debt approached the magic threshold of 35 trillion dollars, it became a signal for deeper reflection on the fundamental changes occurring in the global economic order. This number, which for every American means an average of 100 thousand dollars in public obligations, is merely a symptom of a larger problem – the loss of dollar hegemony on the international stage.

Why China’s plan would completely fail: selling all US Treasury bonds

The provocative question that arises is: what would happen if China suddenly announced the sale of its $771 billion US debt? The answer is less dramatic than it might seem.

China’s bond holdings constitute only 2% of the total US obligations. Although to the average observer this fraction may seem small, on global financial markets it represents a “big fish,” capable of causing significant perturbations. If Beijing simultaneously dumped this arsenal of securities onto the market, Treasury yields would rise sharply – along with the cost of servicing Washington’s debt.

However, China itself would find itself in a tricky situation. As a country with the largest foreign exchange reserves in the world and holding a vast portfolio of dollar-denominated assets, “attacking” the dollar through mass bond sales would be shooting itself in the foot. The depreciation of the US currency would directly translate into losses in Chinese foreign exchange reserves.

Anatomy of debt: what awaits the United States?

The size of obligations amounts to nearly 125% of the United States’ annual gross domestic product. This ratio reflects a fundamental problem: public spending far exceeds tax revenues. From infrastructure to social care and military expenditures – everything requires financing.

The US government has implemented a classic strategy: borrowing from the entire world. Foreign investors, corporations, governments – all have become “creditors” of America. Since the United States has the largest economy, an advanced financial system, and an international reputation, it has managed to benefit from this system for years. The dollar as the world currency enables printing money to service debt through mechanisms such as quantitative easing or interest rate cuts.

However, every system has its limits. Growing debt forces Washington to choose among three options: raising taxes, reducing social spending, or inflating the economy through debt monetization. Each of these paths carries significant social and economic consequences.

Credibility on the line: when debt turns into a trust crisis

Until now, US Treasury bonds attracted investors as a relatively safe haven. This position, however, is based on trust – the belief that America is capable of repaying its obligations. The higher the debt, the more this trust is tested.

If international bondholders begin to doubt the financial stability of the United States and start a mass sell-off of securities, the US economy faces a shock scenario. An increase in bond yields will have a domino effect – companies will pay more for loans, investments will decline, and unemployment will rise. Additionally, America’s international credibility will erode, limiting its political influence on the global stage.

Rising financial strategists: from dollar hegemony to dedollarization

Here emerges a player changing the entire game – the phenomenon of dedollarization. From the “lost decade” in Latin America, through the financial crisis in Southeast Asia, to recent turmoil in Argentina and Turkey – countries worldwide have experienced how the hegemonic position of the dollar serves the expansionist goals of the United States.

The pattern is predictable: the Fed increases the supply of dollars through expansionary monetary policy. Emerging countries, seeing cheap credit, borrow in dollars. When the US economy recovers, the Fed raises interest rates. International capital massively returns to the United States for higher profits. Other countries remain burdened with dollar-denominated debts as the dollar appreciates.

This pattern has repeated many times. As of July 2024, nearly half of the world’s countries are engaged in dedollarization processes. China promotes the internationalization of the yuan, BRICS countries formulate alternative settlement systems involving satellite banking channels, bypassing traditional structures controlled by Washington. Even traditionally Western economies express doubts about the US currency monopoly.

China’s role: from passivity to shaping the order

For China, holding $771 billion in US debt is not just an obligation but a strategic bargaining chip. Instead of selling securities, which would be a destructive move for both sides, Beijing can use them in economic diplomacy. At the same time, China actively promotes an alternative financial order, where influence is not derived from currency dominance but from a coalition of emerging economies.

As the largest developing country, representing emerging economies, and the driving force behind alternative financial structures, China is playing an increasingly central role. Every step Beijing takes influences the trajectory of the global economic architecture.

Implications for ordinary people and the future

For the average global citizen, these processes may seem abstract. Meanwhile, dedollarization will have direct effects: currency exchange rates will change, there may be temporary trade disruptions, and market volatility will increase. In the long run, however, moving away from the hegemony of a single currency should lead to a more stable, diversified financial order.

The current moment in economic history is a turning point. The US debt of 35 trillion dollars is not just a number – it is a symbol of the end of an era where the United States could finance its expenditures through a monopoly on issuing the world’s currency. The future belongs to more multipolar systems, where financial power is dispersed among multiple economic centers.