Skip to content

Staying Power: The Dollar-Security Nexus

Source: Staying Power: The Dollar-Security Nexus by Ho-fung Hung (New Left Review / Sidecar)

TL;DR

The dollar's global dominance is sustained less by market "network effects" and more by the US military security umbrella — what Hung calls the "dollar-security nexus." While this security foundation is weakening (US relative decline, fiscal strains, strategic overreach), no viable alternative exists because China's political system requires strict capital controls that prevent RMB convertibility. Paradoxically, the CCP's governance imperatives prolong the dollar's hegemony. Key data: dollar hegemony as a pure fiat currency (1971–2026) has already lasted more than twice as long as its gold-backed era (1945–1971). In 1947, ~90% of global FX reserves were Sterling — a reminder that reserve currency status can collapse. Offshore RMB deposits in Hong Kong amount to less than 0.5% of onshore deposits, demonstrating the chasm between China's economic weight and its currency's global role. The euro is structurally flawed — it lacks a unified fiscal and political authority. Hung calls it the "great paradox": China's control over its economy has become a key factor in the staying power of the American empire.

The Dollar-Security Nexus

Hung's central thesis is that the dollar's role as the world's reserve currency is not primarily an economic phenomenon — it is a geopolitical one. Countries hold dollars not just because of network effects and liquidity, but because the US provides the security umbrella that makes the global trading system function.

The mechanism works in three directions:

  1. Security for reserve status — US allies hold dollars as part of their geopolitical alignment. Holding dollars means being in the American orbit.
  2. Petrodollar recycling — Gulf states price oil in dollars and invest their surpluses in US Treasuries in exchange for US security guarantees.
  3. Sanctions power — The dollar-based financial system gives the US extraterritorial reach. Exclusion from dollar clearing is a potent weapon — as Russia, Iran, and North Korea have discovered.

Fiat Longevity

A striking historical perspective: the dollar has been a pure fiat currency (since Nixon closed the gold window in 1971) for 55 years — more than twice as long as the Bretton Woods gold-dollar system lasted (1945–1971, ~26 years). Conventional wisdom held that fiat reserve currencies were inherently unstable and would collapse. Instead, the dollar's fiat era has been remarkably durable.

But Hung warns against complacency. In 1947, ~90% of global foreign exchange reserves were Sterling. Within two decades, Sterling's share had collapsed to near zero. Reserve currency status can evaporate faster than markets expect.

The RMB Non-Alternative

China's economic weight (the world's second-largest economy, largest trading nation by many measures) suggests the renminbi should be a natural challenger to the dollar. Yet the RMB accounts for less than 3% of global FX reserves.

Hung identifies the structural barrier: capital controls are not a bug of China's system; they are a feature. The CCP maintains strict controls on cross-border capital flows because:

  • Political stability requires it — free capital mobility would expose China to the sort of financial crises that brought down Asian economies in 1997–98 and would undermine CCP control.
  • The Party needs to manage the currency — a freely convertible RMB would mean accepting market-determined exchange rates, which would constrain domestic monetary policy autonomy.
  • Offshore deposits tell the story — RMB deposits in Hong Kong, the primary offshore RMB hub, amount to less than 0.5% of onshore deposits. There is simply no deep, liquid offshore RMB market.

The paradox: China's need for capital controls is the single biggest factor sustaining dollar hegemony. If China freed its capital account, the RMB could challenge the dollar. But the CCP's governance model precludes that.

The Euro's Structural Flaw

The euro is the other obvious alternative — a currency shared by 340 million Europeans in advanced economies. Yet the euro has never become a serious reserve currency challenger because of its foundational design flaw: monetary union without fiscal or political union.

  • The ECB can print euros, but there is no eurozone finance minister, no eurozone treasury, no eurozone bond that is truly risk-free.
  • The eurozone's fragmented sovereign debt market means there is no deep, unified pool of euro-denominated safe assets comparable to US Treasuries.
  • Political fragmentation means the euro cannot offer the geopolitical security guarantee that the dollar provides.

The Great Paradox

Hung concludes with what he calls the "great paradox" of the contemporary global monetary system:

China's control over its economy has become a key factor in the staying power of the American empire.

The Chinese Communist Party cannot liberalise its capital account without threatening its political control. Without capital account liberalisation, the RMB cannot challenge the dollar. And without a credible RMB challenge, the dollar persists — even as the US security guarantee that underwrites it shows signs of strain.

The dollar's hegemony is sustained not by US strength alone, but by the weakness or structural constraints of every potential alternative.

Key Takeaways

  1. The dollar's power is geopolitical, not just economic — the US security umbrella is the foundation of reserve currency status.
  2. Fiat dollar hegemony is historically unprecedented in duration — 55 years and counting, already 2× longer than the Bretton Woods system.
  3. The RMB is not a viable alternative — China's capital controls, imposed for political reasons, prevent the currency from playing a global role.
  4. The euro is structurally flawed — monetary union without fiscal and political union limits its reserve currency potential.
  5. The great paradox — China's authoritarian governance model, by preventing RMB internationalisation, is a key pillar of dollar hegemony.