In the aftermath of WWII the American economy was that shining city on a hill. After saving mankind from the Nazi’s, America had the only intact manufacturing base and was the repository for most of the world’s gold. Those circumstances propelled the US dollar to world’s reserve currency status. And for the past seventy years, this status has been the cornerstone for America’s power base and hegemony around the globe. 

But the 1960’s ushered in a time of great fiscal mismanagement. President Johnson’s dual wars on poverty and Vietnam led to worldwide distrust about the greenback’s purchasing power in relationship to gold. This eventually led to Nixon’s baneful decision to close the gold window, which untethered the exchange between gold and the dollar.

The pillar of the dollar’s dominance had been the 1944 Bretton Woods System that pegged global currencies to the dollar, which was, in turn, was linked to gold. After the Bretton Woods system was broken under Richard Nixon in 1971, Washington elites and OPEC created the Petrodollar system; where commerce in oil—and most commodities—was mandated to be conducted in U.S. dollars. Coupling the dollar to oil allowed the greenback and the United States to enjoy another forty years of King Dollar. 

This dollar-dominance has given America a lot of discretion in running massive current account and fiscal deficits by enabling it to borrow money at much lower yields than would otherwise be the case without mandating foreign creditors to hold huge currency reserves.      

But now the greenback’s role as the principal currency in which commodities are priced is being challenged. China is leveraging its rise as an economic power and consumer of hydrocarbons to displace the dollar’s dominance in the Persian Gulf and in the former Soviet Union. This will have a deep impact on demand for the U.S. dollar, which will in turn impact yields on Treasuries–and should ultimately threaten America’s strategic position around the world.