Prof. Schlevogt’s Compass No. 43: The dollar poison – How hollowing-out decimates America’s power

The dollar’s reserve status grants the US the luxury of comparatively cheap borrowing and chronic deficits, even as a systemically overvalued currency drives industrial erosion on a vast and clearly measurable scale. To crown injury with indignity, this attrition imperils the strategic foundations of American power.

Beyond deindustrialization: The distinct logic of hollowing-out

World-reserve status has facilitated the long-term real appreciation of the US dollar, undermining the competitiveness of export-oriented manufacturing and placing broader segments of domestic industry under pressure from cheaper imports.

In structurally tilting the economy toward consuming rather than producing tradables, this dynamic led, all else equal, to falling manufacturing employment and a contraction in manufacturing’s share of GDP. The consequences are more profound than those of conventional deindustrialization, amounting to a deeper structural unmaking of the nation’s productive base.

Deindustrialization entails a declining share of manufacturing in employment and GDP, even if total output continues to grow. An economy can deindustrialize as it becomes richer, with productivity gains and rising incomes shifting demand and labor toward services. In such cases, deindustrialization is often a benign byproduct of economic development.

By contrast, industrial hollowing-out signals a qualitatively different and pernicious phenomenon: weakening domestic production linkages, waning ecosystem density, and diminishing industrial depth, all of which undermine economic resilience even when headline output remains respectable. Under these structural conditions, prosperity narrows rather than broadens the economic base. The consequences extend beyond spreadsheets; the fallout is diffuse and uneven.