Wow! This is the "AI 2027" of de-dollarization. I'm no finance person, but I have been looking for analysis and this is the clearest future scenario I've run across. I will make one comment, based on futurological instinct, and that is that change may go even faster than you describe. One of the punishing things about making scenarios in times of rapid change is that you put in the work to look several years ahead, then changes you had scheduled for years away, end up happening within months or even weeks, and you have to start again. But I'm sure your team can rise to the challenge. :-)
Your final point is definitely one I think about a lot. The activation energy may take longer but the idealogies could definitely have a shorter fuse than I lay out here :) Appreciate you reading.
Is the scenario likely to interfere with the development of AI in the USA? How much time can de-dollarisation give China to solve the AI alignment problem?
A short story on the cascading impacts of tariffs
Eleanor Vega’s office window faced east, allowing the morning sun to illuminate the economic indicators flashing red on her screen. On this particular morning at the Treasury Department, she stared at projections that seemed almost apocalyptic, yet mathematically inevitable.
“The President is about to make the announcement,” her assistant said from the doorway.
Eleanor nodded without turning from her display. The models presented a cascade of consequences with 87% confidence intervals that narrowed as temporal distance increased, a rare phenomenon in economic forecasting that signaled high probability outcomes.
On the wall-mounted screen, President William Harmon stepped to the podium with his characteristic swagger. “Today, I’m signing Executive Order 14721, establishing the American Sovereignty Initiative. We’re putting tariffs on everything. Everything! Thirty percent minimum. Some industries, fifty percent. China’s been eating our lunch for decades. Europe’s been taking advantage of us. No more.”
Eleanor listened as financial analysts offered shocked commentary. Markets responded with immediate, brutal volatility; the S&P 500 dropping 4.7% within minutes. The VIX fear index spiked to levels not seen since the 2020 pandemic. Trading algorithms executed sell orders faster than human comprehension, creating liquidity vacuums in multiple sectors simultaneously. Within hours, news alerts pinged about critical imported medical supplies facing delays and price hikes, while automakers reliant on foreign components announced potential production slowdowns. The methodology for calculating the Consumer Price Index immediately became a political flashpoint.
Later that afternoon, in the windowless conference room deep within the Treasury building, a room already thick with tension, Eleanor presented her analysis to the Secretary and senior staff. Some career officials shifted uncomfortably, aware of the implications but constrained by the political climate; whispers of quiet mitigation efforts through regulatory interpretation had already begun in some departments.
“The trade deficit will decrease temporarily,” she explained, highlighting a section of her report. “But the collateral effects are severe. These projections indicate a 78% probability that within four years, we’ll see coordinated diversification away from dollar-denominated assets by central banks globally.”
The Deputy Secretary scoffed. “Predictions about dollar hegemony collapse have circulated since Nixon closed the gold window. Markets always return to fundamental dollar dependence.”
“This scenario differs fundamentally,” Eleanor countered, keeping her voice steady. “Previous challenges remained theoretical or ideological. The current policy actively incentivizes alternate arrangements through imposed transaction costs and systemic uncertainty. We are forcing the world’s hand.”
The Secretary, a political appointee known more for loyalty than economic acumen, waved a dismissive hand. “The President wants reshoring of manufacturing and American economic dominance. Your job is to make it work, not question the policy.”
Eleanor nodded professionally, masking her deep unease. The administration fundamentally misunderstood reserve currency dynamics. Reserve status required stability, liquidity, and predictability. The new policies actively undermined all three.
Three months later, China responded precisely according to Eleanor’s probabilistic models. The People’s Bank of China announced expanded bilateral currency swap lines with seventeen nations. Financial headlines blared the news across Bloomberg, Reuters, and the Financial Times. Russia and India formalized agreements to settle energy trades in local currencies. Brazil proposed a new framework for intra-BRICS trade settlement.
American financial media covered these developments extensively. MarketWatch published an analysis titled “Dollar Dominance: The Beginning of the End?” The Wall Street Journal ran a front-page story examining potential implications. CNBC hosted panels of international economists debating long-term consequences.
Meanwhile, President Harmon’s supporters remained focused on manufacturing job returns in key midwestern states. His approval rating in these regions actually increased despite broader market instability and rising consumer prices. Political polarization regarding economic interpretation reached unprecedented levels.
Stock markets exhibited classic volatility patterns associated with regime uncertainty. The S&P 500 experienced seven circuit breaker halts within a single quarter. Daily swings of 3-5% became commonplace, rattling investor confidence. Institutional investors shifted toward defensive positions, while retail investors divided along political lines—some liquidating positions entirely while others invested heavily in companies perceived to benefit from protectionist policies. The sheer noise and panic on trading floors, visible even on muted news feeds, hinted at the deeper systemic stress.
Eleanor recognized these patterns as the first quantifiable indicators of a fundamental shift in global monetary architecture.
Eleanor’s analytical team tracked subtle but accelerating changes in international reserves. Central banks diversified without announcing their strategies, masking their moves in complex derivatives and offshore accounts. Treasury auctions showed decreased foreign participation, particularly from traditional large holders like Japanese pension funds, requiring higher yields to attract sufficient buyers, straining the federal budget.
The 10-year Treasury yield rose to 6.7%, forcing the Federal Reserve into an impossible dilemma between controlling inflation and accommodating government borrowing costs. They chose the latter, implementing what economists termed “fiscal dominance”—a condition where monetary policy becomes subservient to government financing needs. This decision further undermined international confidence.
Unemployment reached 7.3% nationally. Manufacturing states crucial to the President’s electoral base showed modest job growth in newly protected industries, allowing him to claim success despite broader economic deterioration.
“We’re winning,” President Harmon declared at a rally in Ohio. “America is coming back. The naysayers don’t understand my strategy. It’s beautiful. Jobs are coming back. More factories opening every day.”
The data supported this claim in narrowly defined sectors. Industries with high tariff protection and government subsidies expanded manufacturing capacity and employment. Meanwhile, the broader economy experienced textbook stagflation, rising prices alongside stagnant growth. The consumer price index increased 9.8% year-over-year while GDP growth remained below 1%. Retirement accounts diminished in value, hitting middle-class families hard and reducing consumption. Companies delayed capital expenditures due to uncertainty, reflected in plummeting durable goods orders. New business formation declined 22% year-over-year.
Stock market bifurcation intensified. Companies with primarily domestic revenue streams outperformed multinationals by an average of 27%. Defense contractors, certain manufacturing segments, and companies involved in resource extraction performed exceptionally well. Technology firms, particularly those dependent on global supply chains, entered bear market territory with sustained contractions exceeding 30%.
Eleanor received an unexpected call that autumn from California’s State Treasurer, requesting a discreet meeting. She agreed out of academic curiosity rather than protocol.
“Several coastal states are exploring contingency plans,” he explained in the neutral setting of a downtown coffee shop, glancing around nervously. “California, New York, Washington, Massachusetts. Together we represent nearly 40% of national GDP. We need options if federal policy continues on this trajectory.”
“What precisely are you proposing?”
“A parallel settlement system for interstate commerce and international trade conducted by our states. Nothing illegal, just alternative infrastructure.” He mentioned early discussions with major tech firms headquartered in their states, exploring blockchain solutions.
Eleanor should have reported this conversation immediately. Instead, she found herself sketching designs that evening for what would eventually become FedCoin, a distributed ledger system that could function as alternative currency infrastructure should the need arise. Not illegal, as the California Treasurer had emphasized. Just alternative. The news carried reports of congressional committees beginning inquiries into these state-level discussions, and veiled threats from the Justice Department about federal preemption in monetary matters only added to the tension.
The system she designed incorporated productivity-indexed asset backing through a collateral pool of state tax revenue streams, natural resources, and public infrastructure; creating intrinsic value fundamentally absent from purely speculative cryptocurrencies. States and corporations viewed FedCoin as valuable precisely because it linked monetary supply to the actual productive capacity of their regional economies rather than federal fiscal decisions.
President Harmon, meanwhile, implemented what he called “patriotic finance measures”, capital controls limiting the ability of Americans to move assets overseas. “Financial treason,” he called capital flight. “We’re stopping the globalists from sabotaging American prosperity.”
In Europe, fragmentation accelerated. Germany, dependent on exports and energy imports, negotiated special economic provisions with China and Russia. France led a Mediterranean economic bloc. The United Kingdom, having already severed ties with the EU, explored closer alignment with Commonwealth nations.
The International Monetary Fund’s quarterly report now openly discussed “a transition to a multipolar currency system”; diplomatic language for the end of dollar dominance.
More concretely, Saudi Arabia announced that oil contracts would now be settled in a basket of currencies, including dollars, euros, yuan, and bitcoin. Energy markets convulsed as traders adjusted to the new reality.
The $13 trillion Eurodollar market, dollar-denominated deposits outside U.S. jurisdiction that had functioned as the shadow plumbing of global finance for decades, experienced cascading settlement failures. As counterparty risk soared, banks became unwilling to lend dollars short-term even to formerly trusted partners. European banks with heavy dollar liabilities but insufficient dollar assets faced margin calls they couldn’t meet. Unexpectedly, financial institutions in Singapore, Toronto, and Dubai suffered liquidity crises due to their roles as Eurodollar clearing nodes, revealing contagion pathways most economic models had underestimated. Key repo markets seized, and conduits funding off-balance-sheet vehicles reliant on dollar commercial paper simply evaporated.
Eleanor’s personal funds were now divided between physical gold, foreign real estate, and early implementation trials of FedCoin with trusted technical partners. Her patriotism remained undiminished. Her faith in federal economic management had collapsed entirely.
The U.S. sovereign debt crisis began with a failed Treasury auction. The bid-to-cover ratio plunged to near 1.0, the auction “tail” exploded to unprecedented levels, and major foreign official buyers were completely absent. For the first time in modern history, the United States could not roll over maturing debt without direct, massive Federal Reserve intervention. An emergency FOMC meeting was convened, debating the activation of obscure GFC-era lending facilities versus outright debt monetization, a choice between hyperinflation and immediate default. Bond markets seized, commercial paper markets froze, and interbank lending rates spiked to crisis levels.
Within the coalition of coastal states, what had begun as theoretical contingency planning accelerated into implementation. The distributed ledger system, now officially called FedCoin despite having no federal authorization, gained traction among state agencies and major corporations headquartered in coalition states.
“We need to be ready for all scenarios,” the Governor of New York stated in a carefully worded press release that neither confirmed nor denied state involvement in alternative currency development. His cautious phrasing couldn’t mask the seismic implications: states openly building financial infrastructure independent of federal control, a direct challenge to monetary sovereignty not seen since the Civil War.
President Harmon, addressing the nation from the Oval Office with barely concealed fury, blamed “economic saboteurs” and “rogue state actors” for the crisis. He announced the formation of an Economic Sovereignty Task Force, granting it broad investigative powers under obscure national security statutes. “Anyone undermining the dollar commits treason against the American people,” he declared, his gaze fixed firmly on the camera. The message was clear: the federal government would use its full power to crush dissent. Rumors quickly circulated about federal investigators targeting state officials involved in the FedCoin project and executives at corporations facilitating its use, hinting at asset freezes and invoking federal supremacy clauses in closed-door meetings. A constitutional crisis was no longer theoretical; it was imminent.
Eleanor felt a chill despite the warmth of her office. Her work on FedCoin, initially conceived as a contingency, now placed her directly in the crosshairs of a President wielding accusations of treason like a weapon. The line had been crossed. She continued nonetheless, driven by the conviction that the old system was irrevocably broken and something had to replace it.
The unmarked sedan arrived at Eleanor’s Georgetown townhouse before dawn. Two agents displayed Treasury Department credentials and requested she accompany them. Not an arrest, they emphasized. A meeting.
The motorcade drove not to Treasury but to the White House, where she was escorted through side corridors to a small conference room adjacent to the Oval Office. The President’s economic advisors sat around the table, faces grim. On the table was a laptop displaying technical documentation of FedCoin’s architecture. Her architecture.
The door opened and President Harmon entered, his physical presence more imposing than television suggested.
“Dr. Vega,” he said without preamble. “I’m told you’re the architect of this alternative system.”
Eleanor saw no benefit in denial. “Yes, Mr. President.”
“And it works? It’s viable?”
The question surprised her. “Yes. We’ve processed over six billion in transactions through test networks. The distributed validation protocol ensures no single authority can manipulate the ledger, while the authorized node structure prevents the volatility issues that plagued early cryptocurrencies.”
President Harmon nodded, processing this information with unexpected calmness. “I want controlling interest. Fifty-one percent of nodes under federal authority.”
The statement hung in the air. Not shutdown. Not arrest. Control.
“Sir?” Eleanor managed.
“You think I don’t see what’s happening?” The President’s voice remained measured, almost philosophical. “The world changes. Dollar dominance faces inevitable decline. But managing decline differs fundamentally from surrender.”
He turned to gaze out the window toward the Washington Monument. “History remembers leaders who adapt. Roman emperors reformed currency when debasement became undeniable. Their governance survived centuries after the Republic collapsed.”
Eleanor realized with astonishment that the President understood precisely what was happening. He had calculated that his political interests were best served by nationalist rhetoric while preparing for the inevitable transition.
“The government requires control of the monetary system,” he continued, “regardless of the technical infrastructure. FedCoin continues development, but with federal oversight. You continue as technical lead. I announce it as my initiative to modernize American finance and ensure continued leadership.”
Eleanor considered her options. Refusing meant destroying years of work and potentially facing prosecution. Agreeing meant ceding control of a system designed specifically to operate independent of centralized authority.
“I’ll need technical guarantees,” she said finally. “Immutable code provisions that prevent certain types of manipulation.”
The President smiled. “Details to be worked out by the technical teams. But we have a framework?”
“We have a framework, Mr. President.”
The implementation of “American Digital Currency” as it was now officially known proceeded under Eleanor’s technical direction. Publicly, it represented a modernization of financial infrastructure. Privately, Eleanor encoded safeguards that even federal authorities couldn’t circumvent—decentralized dead-man switches ensuring the system would fragment into truly independent shards if manipulated beyond certain parameters.
President Harmon, facing term limits, had effectively secured his legacy. His Vice President, Jonathan Reynolds, won the election on a platform of “Economic Patriotism”, a moderated version of Harmon’s policies that maintained the rhetoric while subtly adjusting implementation parameters. Harmon himself transitioned to an advisory role with unprecedented influence, maintaining office space in the West Wing and direct access to critical decision-making.
International adoption proceeded along predictable geopolitical lines. Allied nations integrated with the American system. China expanded its digital yuan. Regional blocs developed their own solutions. The multipolar currency reality was now acknowledged fact rather than theoretical prediction.
The dollar remained significant but no longer dominant, settling approximately 31% of international transactions compared to 59% five years earlier. Treasury yields stabilized at 8.2%, high by historical standards but no longer rising. Domestic inflation persisted at uncomfortable levels, but the acute crisis had passed.
Eleanor submitted her resignation from the Treasury Department, accepting a position as “Architecture Consultant” to the consortium of state authorities that maintained significant influence within the system. Her legal status remained intentionally ambiguous; neither fully exonerated nor prosecuted for her role in developing what had initially been unauthorized infrastructure.
On her last day at Treasury, she received an encrypted message on her cell phone: “Initial rollout successful: alternative systems operational across seventeen jurisdictions. Key financial centers (Singapore, Switzerland, UAE) seeking technical integration standards. New global structure emerging in three tiers: 1) Smaller economies holding digital assets like Bitcoin/stablecoins as reserves. 2) Major economic blocs (like US states using FedCoin) running regional currencies backed by productivity. 3) Traditional US allies forming a diminished dollar bloc. Your expertise needed to navigate transition.”
Eleanor stared at the message for a long moment. The global financial architecture was fragmenting into competing monetary paradigms. The dissolution was both inevitable and alarming. Power was shifting in ways that would reshape geopolitics, trade relationships, and domestic governance for decades to come.
She began composing her reply, uncertain whether she was witnessing the terminal phase of an established order or the embryonic stage of a fundamentally different system. The monetary frameworks that had governed international finance for eight decades were unraveling. New concentrations of influence were emerging; operating according to different principles but potentially no less concentrated in their ultimate effects.
As Eleanor typed her response, she knew that beyond certain critical thresholds, even the most sophisticated models could no longer generate reliable predictions. They had crossed that boundary months ago.