Guest: Kenneth Rogoff, Professor of Economics at Harvard University
Dollar Dominance, Debt, and the Risks We Ignore
Welcome to the penultimate newsletter of the year and in it I am delighted to introduce you to the first of two special holiday podcasts, this one with renowned Harvard Professor, Ken Rogoff.
Prof. Rogoff does not frame today’s economic risks as speculative or alarmist. He frames them as familiar. The danger, he argues, lies not in what is unprecedented, but in what policymakers and investors repeatedly convince themselves cannot happen.
That intellectual posture underpins both his latest book, Our Dollar, Your Problem, and his earlier work, This Time Is Different. Across decades and centuries of financial history, Rogoff has documented a recurring pattern: long periods of stability breed confidence, confidence breeds leverage, and leverage breeds denial. Eventually, reality intrudes.
Why the Dollar Still Matters – and Why Its Privilege Is Eroding
Rogoff begins with a deceptively simple question: why should American consumers care about dollar dominance?
His answer is straightforward. “We pay lower interest rates because of the dollar dominance,” he explains, estimating that global demand for dollars likely reduces U.S. borrowing costs by roughly one percentage point across mortgages, corporate loans, and government debt.
Given the scale of U.S. borrowing, that advantage is material. Dollar dominance also confers less visible benefits. It gives the United States unparalleled insight into global financial flows – that extends even into spycraft. It enables sanctions to function as a substitute for military force. It embeds the “plumbing” of the global financial system inside U.S. jurisdiction.
But Rogoff is clear: this dominance is not immutable. Market share matters. At its peak roughly a decade ago, the dollar’s position was stronger than it is today. Europe no longer sits inside the dollar bloc. China, which Rogoff notes represents roughly half of the remaining dollar bloc via Asia, is actively diversifying away. Financial sanctions, used increasingly and broadly, are accelerating that process by encouraging countries to seek alternatives.
The result is not collapse, but erosion. Rogoff estimates that diversification away from the dollar has already contributed perhaps a quarter-point increase in long-term U.S. interest rates. Small in isolation, meaningful over time.
Debt, Interest Rates, and the New Vulnerability
The more serious vulnerability, in Rogoff’s view, is internal. The United States is now the world’s largest borrower – in public debt, corporate borrowing, and aggregate leverage. This alone would be manageable if interest rates remained near zero. But they have not.
“For 40 years, interest rates were just dropping and dropping,” Rogoff observes. That secular decline anesthetized political and fiscal discipline. Now rates are materially higher, and debt levels are materially larger. This combination is historically dangerous.
Rogoff emphasizes that the U.S. has never before been the world’s largest borrower at a time when global interest rates were rising. That puts the country squarely in the crosshairs of any future shock – geopolitical, financial, or political.
Central Bank Independence Under Pressure
A cornerstone of U.S. monetary credibility has been an independent Federal Reserve. Rogoff argues that this institutional safeguard is increasingly under strain from multiple directions, at a moment when it matters more than it has in decades. The political incentive is straightforward. Governments always prefer lower interest rates. Lower rates ease debt service, stimulate asset prices, and provide short-term economic relief.
That temptation intensifies when public debt is high and electoral cycles are short. While pressure on the Fed is often associated with populist politics, Rogoff is careful to note that skepticism toward central bank independence is not confined to one side of the aisle. He observes that progressive critics, too, have grown hostile to the idea of delegating monetary authority to unelected officials.
The danger, in Rogoff’s telling, is not an abrupt collapse into hyperinflation. It is something more subtle and more corrosive: the gradual erosion of confidence that inflation will remain anchored over time. Once markets begin to suspect that monetary policy is being subordinated to political priorities, the adjustment does not occur where policymakers expect it.
Rogoff stresses a widely misunderstood point. The Federal Reserve does not control long-term interest rates. It controls only the overnight rate. Long-term rates, which matter far more for mortgages, commercial real estate, and capital investment, are set by markets based on expectations about inflation, fiscal discipline, and institutional credibility.
If investors believe that political pressure will eventually lead to higher inflation, long-term rates will rise even if the Fed cuts short-term rates aggressively. Independence, then, is not an abstract principle. It is a practical mechanism for aligning market expectations with long-term stability. Once that credibility is damaged, restoring it is costly and slow, as the United States learned in the 1970s.
Rogoff’s concern is not that the Fed will suddenly lose control, but that persistent pressure, applied incrementally, risks undermining the very confidence that allows U.S. borrowing costs to remain manageable.
Commercial Real Estate, Banking, and Systemic Risk
On commercial real estate, Rogoff is measured rather than alarmist. Office sector weakness and refinancing stress pose real risks, but he does not see them as systemically destabilizing in the way housing was in 2008.Refinancing stress unfolds slowly. Exposure is dispersed across banks, hedge funds, and private vehicles. Losses will occur, but Rogoff does not expect a sudden collapse.
The greater macro risk, he argues, lies elsewhere – particularly in the interaction between public debt, political paralysis, and inflation risk.
AI, Markets, and the Illusion of Stability
AI plays a dual role in Rogoff’s analysis. It is both a source of optimism and a concentration risk. AI has supported U.S. growth, equity markets, and corporate profitability. But Rogoff is explicit: bubbles around transformative technologies are common, and reversals can be abrupt.
“We could have a bursting of the AI bubble in five years,” he says, “but it could happen in five days.” What surprises him most is not market exuberance, but complacency. Volatility remains unusually low despite geopolitical risk, policy uncertainty, and technological disruption. Rogoff expects that to change.
“This Time Is Different” – Again
Rogoff’s enduring contribution has been to quantify what earlier historians described anecdotally: financial crises recur with unsettling regularity, especially when societies convince themselves they are obsolete.
Advanced economies rarely default outright. Instead, they inflate away debt, repress financial markets, or impose losses selectively. The U.S. has done this before – in the 1930s and again in the 1970s. Rogoff does not predict catastrophe. He predicts inevitability. Shocks arrive every seven to eight years. Policy responses lag until crisis forces action.
The Likely Path Forward
Rogoff’s most sobering assessment is political. There is no constituency for fiscal restraint absent crisis. Both parties behave similarly when in power. Adjustment will come, but only after markets impose it.
His timeline is measured but firm. In his book, he estimated five to ten years. Today, he suggests four to five. The risk is not that the U.S. becomes Argentina. The risk is a slow erosion of credibility, higher borrowing costs, financial repression, or inflation used as a release valve. History suggests these outcomes are not aberrations. They are the default.
Concluding Thoughts
What Rogoff offers is not a forecast to trade on, but a framework to think with. His argument is fundamentally about time horizons and incentives. The privileges the United States enjoys today - lower borrowing costs, deep capital markets, monetary flexibility - are real. But they are not free, permanent, or immune to misuse. They depend on credibility, discipline, and institutions that restrain short-term political impulses in favor of long-term stability.
The central tension running through the conversation is that the forces undermining that credibility move slowly, almost imperceptibly, until they do not. Dollar erosion is gradual. Debt accumulation is incremental. Institutional pressure builds quietly. None of it looks like crisis in isolation. Together, over time, it becomes one.
For investors, Rogoff is notably restrained. Markets can remain buoyant longer than skeptics expect. Bubbles can inflate further before they burst. Stability can persist even as underlying risks grow. His warning is not that capital should flee, but that complacency is rarely rewarded indefinitely. For policymakers, the message is harsher.
The United States has repeatedly deferred hard choices until they are forced by markets or shocks. Rogoff sees little reason to believe this cycle will be different. Adjustment will come, but likely only after credibility is tested, borrowing costs rise, or inflation becomes unavoidable.
The uncomfortable conclusion is that none of this is new. The patterns are old, well-documented, and widely understood. What changes is not the script, but the cast, the context, and the specific trigger.
In that sense, Rogoff’s work serves less as a warning than as a reminder. The greatest risks are rarely the ones we have never seen before. They are the ones we convince ourselves no longer apply.
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If you would like to contribute to this conversation, I have published some abbreviated commentary on LinkedIn.
Access that post on LinkedIn here.
And click here to listen to or watch the episode.
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Second episode and my final newsletter of the year will be out this Thursday, December 18; a conversation with Moody's Analytics' Chief Economist, Mark Zandi - in your inbox on Thursday.
Adam
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