“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
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“Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
“Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
“Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
“Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
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Falling Trade, Rising Imbalances

Brad Setser Council on Foreign Relations

Date Posted:: August 25, 2020
Is Database:: Database

China’s trade surplus has surged, with exports to the US returning to pre-trade war levels. China spends only 75c of every $1 earned from goods exports on imports, and just 50c for manufactured goods. @Brad_Setser

Despite global trade downturns, China's trade surplus has surged, highlighting its unique position in the global economy. In July, China's exports to the US returned to pre-trade war levels, defying tariffs on $250bn of Chinese goods. China's exports to Europe have also increased significantly, underscoring its robust export performance amid a general decline in global trade. Notably, China spends only 75 cents of every dollar earned from goods exports on imports, and just 50 cents for manufactured goods. This imbalance is significant given China's export volume of over $2tn in manufactures. The data suggests a lag in recognizing China's growing trade surpluses, which are reshaping economic dynamics in Asia.

Takeaways by Macro Roundup^® AI

China spends only 75 cents of every dollar earned from goods exports on imports, and just 50 cents for manufactured goods, an imbalance magnified by export volume exceeding $2tn in manufactures.
China's exports to the US returned to pre-trade war levels in July despite tariffs on $250bn of Chinese goods, and its exports to Europe also increased significantly.
China's trade surplus has surged even as global trade has declined, and the data suggests a lag in recognizing surpluses that are reshaping economic dynamics in Asia.

New Sester while trade is down globally China's surplus is way up. So much for decoupling, despite significant tariffs on $250b of Chinese exports, China's exports to the U.S. in July were back at their pre-trade war level

"….But amid all the disruption to global trade from the unprecedented COVID-19 shock, China is emerging as a special case. Its strong export performance stands out all the more amid a generalized fall in global trade.The euro area data shows that China’s exports to Europe are way up. And the Chinese data shows a big increase in Chinese exports to the United States in July as well (which likely will be confirmed when the U.S. data for July comes out).... I have come to realize over time that the both the popular and the elite debate over China tends to lag what’s in the data.Trump was talking about going after China for manipulation well after China had stopped intervening to hold its currency down (it may be back in the market, but at this stage all I have is circumstantial evidence…but that’s for another blog). Folks (at the IMF and a lot of big banks) were talking about how China was heading toward a current account deficit for several quarters after it was clear that China had hit an inflection point and its surplus was rising again. And it will take some time for the current data to sink in and for elite debate to recognize that big trade surpluses are once again in Asia…..But the fact remains that of every dollar China received on its goods exports, it now is only spending around 75 cents on imported goods. And if you just look at manufactures, for every dollar China receives it spends only about 50 cents on imports. If you export over $2 trillion of manufactures that starts to matter…."

Falling Trade, Rising Imbalances: Extended Excerpt Image 1

Brad Setser, "Falling Trade, Rising Imbalances...," Council On Foreign Relations, August 20, 2020, https://www.cfr.org/blog/falling-trade-rising-imbalances

How To Buy A Trade Surplus

Joseph Gagnon and Nishtha Agrawal Peterson Institute For International Economics

Date Posted:: July 29, 2026
Is Database:: Database
Is Important:: Important

Using annual data for 146 countries from 1985 – 2024, Gagnon and Agrawal find that a $1 increase in a country’s cyclically adjusted fiscal deficit is associated with a 22–38¢ increase in its current-account deficit, with most of the estimates ~30¢.

Table 1 presents regression results. The evidence strongly suggests that governments can buy current account surpluses. Raising the fiscal balance by $1 tends to raise the current account by $0.30 [Table 1, first row]. Issuing $1 of domestic currency debt to buy foreign-currency assets (foreign exchange intervention) raises the current account anywhere from $0.20 to $1.00, with a value around $0.50 to $0.60 most plausible [Rows 2 though 5]. NOF is Net Official Flows, and NOS is the stock of net official foreign assets. The most powerful policy, as exemplified by Norway and Singapore, is to run a fiscal surplus and invest the proceeds in foreign-currency assets. In that case, $1 buys a current account surplus of around $0.80 or so. The results are supported by annual panel regressions of current accounts and cross-country stock regressions of cumulated current accounts or stocks of net foreign assets. The estimated effects in the panel regressions may be biased down slightly by incomplete modeling of lagged effects.

Takeaways by Macro Roundup^® AI

Regression results suggest that raising the fiscal balance by $1 tends to raise the current account by about $0.30.
Issuing $1 of domestic currency debt to buy foreign-currency assets is estimated to raise the current account by $0.20 to $1.00, with $0.50 to $0.60 most plausible.
Combining a fiscal surplus with investment of the proceeds in foreign-currency assets, as Norway and Singapore do, is estimated to buy a current account surplus of around $0.80 per $1.

Honey, Who Shrunk the U.S. Income Surplus?

Matthew Higgins and Thomas Klitgaard Liberty Street Economics

Date Posted:: May 19, 2026
Is Database:: Database

The US net international investment position worsened by about $16tn between 2019 and 2025, driven by roughly $5.5tn in net inflows and $10tn in valuation losses, as higher rates hit a larger net liability stock, raising interest rate-sensitivity.

Foreign holdings of U.S. financial assets are immense, with official estimates putting their current market value at $69 trillion. U.S. holdings of foreign assets are also impressive but much smaller, at $41 trillion. The shortfall in U.S. foreign assets relative to foreign liabilities has been mounting for decades. Yet U.S. investment income receipts—in profits, dividends, and interest—comfortably exceeded income payments until recently. Payments on U.S. assets owned by foreign investors represent a servicing burden for the U.S. economy. Profits, dividends, and interest payments that would otherwise accrue to domestic investors instead flow abroad. Given the need to sell U.S. assets to finance ongoing trade deficits, this servicing burden seems likely to mount. The related buildup in the U.S. net liability position in interest-bearing assets will also make the income balance more sensitive to swings in interest rates. This increased sensitivity is already in evidence. At present, with the asset-liability gap at -$15 trillion, a 1 percentage point increase in U.S. and foreign interest rates would subtract $150 billion from the U.S. net income balance. (A 1pp fall in rates would result in a similar improvement.) Only five years ago, a 1 percentage point rise in rates would have subtracted $100 billion.

Takeaways by Macro Roundup^® AI

Official estimates put the current market value of foreign holdings of U.S. financial assets at $69tn, against $41tn of U.S. holdings of foreign assets, a shortfall that has been mounting for decades.
With the U.S. asset-liability gap in interest-bearing assets at -$15tn, a 1 percentage point rise in U.S. and foreign interest rates would subtract $150bn from the U.S. net income balance, compared with $100bn five years ago.
U.S. investment income receipts in profits, dividends, and interest exceeded income payments until recently, and the servicing burden on foreign-owned U.S. assets seems likely to mount given the need to sell U.S. assets to finance ongoing trade deficits.

Don't Blame America's Current Account Deficit On the Dollar

Maurice Obstfeld Peterson Institute for International Economics

Date Posted:: April 14, 2026
Is Database:: Database

Noting the minimal relationship between official liabilities and the CA, Obstfeld argues that the reserve currency role of the dollar is not the cause of the trade deficit. He urges reduction in the US fiscal deficit to increase national saving.

Critics of the dollar's global role have argued that foreign official dollar purchases (labeled US incurrence of official liabilities in the figure) feed one-for-one into US current account deficits. To illustrate the true loose relationship between these two variables, the figure shows both of them over the 2003–25 period, as percentages of GDP. US net incurrence of liabilities to official holders, reported with a minus sign as in standard balance-of-payments methodology, is usually far too small to mirror the US current account deficit. And since roughly 2014, net official financial inflows have fluctuated around zero as the current account deficit has widened. To be sure, the strong international demand for dollars may make the dollar stronger against foreign currencies than it would be otherwise, [but] while they imply a smaller current account balance, they do not necessarily imply a negative balance and certainly not a rising negative balance, especially when foreign dollar reserve holdings have been shrinking relative to global economic activity (as figure 1 also implies). The euro is the world's second reserve currency, yet the euro area has a current account surplus. Britain had surpluses up until World War I despite issuing the world's premier global currency and hosting its leading financial center. Reducing the US fiscal deficit materially and sustainably is the most important US policy prerequisite for global current account rebalancing.

Takeaways by Macro Roundup^® AI

US net incurrence of liabilities to official foreign holders over 2003–25, measured as a share of GDP, is usually far too small to mirror the US current account deficit, contradicting claims that official dollar purchases feed one-for-one into it.
Since roughly 2014, US net official financial inflows have fluctuated around zero while the US current account deficit widened, and foreign dollar reserve holdings have been shrinking relative to global economic activity.
The euro area runs a current account surplus despite the euro's status as the world's second reserve currency, and Britain ran surpluses until World War I while issuing the premier global currency and hosting its leading financial center.

Understanding Global Imbalances

IMF Staff International Monetary Fund

Date Posted:: April 7, 2026
Is Database:: Database

As of 2024, the US, China, Germany, and Japan accounted for ~2/3 of total global imbalances (the sum of the absolute value of each economy’s current account deficit and surplus). The US CA deficit is between 0.8 and 1% of world GDP.

Four economies—the US, China, Germany, and Japan—account for roughly two-thirds of global imbalances. The US deficit—equivalent to 4% of GDP as of 2024—has been financed by capital inflows and portfolio investors seeking dollar assets. Germany and Japan’s surpluses have been driven by high saving rates, joined by substantial surpluses in China beginning in the 2000s. Oil-exporting countries’ surpluses fluctuate with commodity prices, creating episodic contributions to global imbalances. In earlier decades, surpluses and deficits were more cyclical: countries moved in and out of surplus depending on business cycles, commodity shocks, and exchange rate movements. While there is no standard definition of persistence, the average duration of a deficit or surplus spell roughly doubled since the 1980s. Persistent surpluses over the past two decades have accumulated into very large net foreign asset positions for economies such as China, Germany, and Japan, with each holding net foreign assets equivalent to 3–3.5% of global GDP in 2024. Similarly, persistent deficits have built up into large net liability positions, most notably in the US where the NIIP stands at about -25% of global GDP in 2024, underscoring the central role of the US position in global balances (Figure 6).

Takeaways by Macro Roundup^® AI

The US, China, Germany, and Japan together account for roughly two-thirds of global imbalances, with the US deficit equal to 4% of GDP in 2024, financed by capital inflows and portfolio investors seeking dollar assets.
The average duration of a deficit or surplus spell roughly doubled since the 1980s, when countries moved in and out of surplus with business cycles, commodity shocks, and exchange rate movements.
China, Germany, and Japan each held net foreign assets equivalent to 3–3.5% of global GDP in 2024, while the US net international investment position stood at about -25% of global GDP.

China’s Cheap Money Is Shaking $9.5 Trillion Global Loan Market

Bloomberg Staff Bloomberg

Date Posted:: March 5, 2026
Is Database:: Database

China’s savings glut and “monetary easing to counter slowing growth” are manifesting themselves in credit expansion overseas, as bankers seek higher yields than they can get at home amidst deflationary pressure.

Chinese banks, flush with low-cost funds, are reshaping parts of the global loan market, underscoring how deflationary pressures in the world’s second-largest economy are increasingly influencing competition with international lenders. Much like US and European manufacturers who have long complained about being undercut by cheaper Chinese rivals, bankers at global institutions now say they’re facing the financial equivalent: being priced out of some of Asia’s most sought-after borrowers as Chinese lenders extend cheaper credit across borders. Enabled by Beijing’s monetary easing to counter slowing growth, Chinese banks are expanding overseas lending amid weakening domestic credit demand. That edge may prove even more significant as the Iran crisis threatens to upend global energy markets, raising the likelihood that major central banks will hold off easing interest rates amid mounting uncertainty.

Takeaways by Macro Roundup^® AI

Chinese banks, flush with low-cost funds from Beijing's monetary easing, are reshaping parts of the $9.5 trillion global loan market by extending cheaper credit across borders.
Bankers at global institutions say they are being priced out of some of Asia's most sought-after borrowers by Chinese lenders, a financial equivalent of the undercutting US and European manufacturers have long complained about.
Weakening domestic credit demand in China is accompanying an expansion of its banks' overseas lending, an edge that may prove more significant if the Iran crisis leads major central banks to hold off easing interest rates.

Tariffs and "International Payments Problems"

Matt Klein The Overshoot

Date Posted:: March 4, 2026
Is Database:: Database

The worsening of the US net international investment position – from -20% of US GDP in 2010, to -53% pre-pandemic, and to -89% as of the end of 2025Q3 – reflects valuation gains on US stocks relative to stocks in the rest of the world.

Foreigners are accumulating more financial claims on Americans than Americans are accumulating on foreigners across every single category: FDI, stocks, bonds, physical currency, deposits, and loans. Foreign official investors supposedly have been mild sellers of U.S. assets over the past 12 months, but the standard measure does not include state-affiliated institutions that operate on behalf of foreign governments. Meanwhile, the U.S. net international investment position has swung massively over the past few years, from -20% of U.S. GDP in 2010, to -53% of U.S. GDP on the eve of the pandemic to -89% as of the end of 2025Q3. Almost all of that reflects massive valuation gains on U.S. stocks relative to stock markets in the rest of the world. The good news is that actual U.S. indebtedness has not meaningfully increased, and the methods used to assign market values to FDI in the U.S. and abroad make the situation look more extreme than it is. (U.S. FDI assets in Ireland are overwhelmingly big tech and big pharma, for example, but the market value of those assets is imputed based on the performance of the maker of Kerrygold.) The bad news is that, if the current level of the NIIP is unsustainable, the easiest way for it to revert is for U.S. stock prices to fall dramatically.

Takeaways by Macro Roundup^® AI

The U.S. net international investment position swung from -20% of GDP in 2010 to -53% just before the pandemic and -89% as of 2025Q3, almost all reflecting valuation gains on U.S. stocks relative to foreign stock markets.
Foreigners are accumulating more financial claims on Americans than Americans are on foreigners in every category — FDI, stocks, bonds, physical currency, deposits, and loans — while actual U.S. indebtedness has not meaningfully increased.
Methods for assigning market values to foreign direct investment make the imbalance look more extreme than it is, since U.S. FDI assets in Ireland are overwhelmingly big tech and big pharma yet are valued using the performance of the maker of Kerrygold.

China’s trade surplus has surged, with exports to the US returning to pre-trade war levels. China spends only 75c of every $1 earned from goods exports on imports, and just 50c for manufactured goods. @Brad_Setser

Why is China's trade surplus growing while global trade declines?

Takeaways by Macro Roundup® AI

Using annual data for 146 countries from 1985 – 2024, Gagnon and Agrawal find that a $1 increase in a country’s cyclically adjusted fiscal deficit is associated with a 22–38¢ increase in its current-account deficit, with most of the estimates ~30¢.

Can governments buy current account surpluses with fiscal and currency policy?

Takeaways by Macro Roundup® AI

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The US net international investment position worsened by about $16tn between 2019 and 2025, driven by roughly $5.5tn in net inflows and $10tn in valuation losses, as higher rates hit a larger net liability stock, raising interest rate-sensitivity.

How does a growing net liability position affect U.S. investment income?

Takeaways by Macro Roundup® AI

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Noting the minimal relationship between official liabilities and the CA, Obstfeld argues that the reserve currency role of the dollar is not the cause of the trade deficit. He urges reduction in the US fiscal deficit to increase national saving.

Does the dollar's reserve role drive the US current account deficit?

Takeaways by Macro Roundup® AI

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As of 2024, the US, China, Germany, and Japan accounted for ~2/3 of total global imbalances (the sum of the absolute value of each economy’s current account deficit and surplus). The US CA deficit is between 0.8 and 1% of world GDP.

How persistent are global current account imbalances and which economies drive them?

Takeaways by Macro Roundup® AI

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China’s savings glut and “monetary easing to counter slowing growth” are manifesting themselves in credit expansion overseas, as bankers seek higher yields than they can get at home amidst deflationary pressure.

Are Chinese banks undercutting global rivals in cross-border lending?

Takeaways by Macro Roundup® AI

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The worsening of the US net international investment position – from -20% of US GDP in 2010, to -53% pre-pandemic, and to -89% as of the end of 2025Q3 – reflects valuation gains on US stocks relative to stocks in the rest of the world.

Does the deteriorating U.S. investment position reflect borrowing or stock valuations?

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