Edward Conard

Top Ten New York Times Bestselling Author

  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “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
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “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
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences
Buy the Books
  • Macro Roundup
  • About Roundup
  • About Ed Conard
  • Highlights
  • Topics
  • Subscribe
Edward Conard
  • twitter
  • facebook
  • linkedin
  • youtube
  • Email
  • Text Message (SMS)
  • Twitter/X
  • LinkedIn
  • Facebook
  • WhatsApp Message
Subscribe to Macro Roundup Emails
  • Mentions 243
  • Primary focus 115
Showing 115 database articles primarily about Savings Glut/Trade Deficit
Currently filtering by:
  • Remove Savings Glut/Trade Deficit
  • Remove "primary topics only" restriction
  • Remove 'Database'
Show all 7,315 articles
For whatever topics you select (currently: Savings Glut/Trade Deficit):
Choose search scope

Your importance filter 'Database' shows fewer articles.

Remove filters to see full article counts

The Class Politics of the Dollar System

AI Summary. The dollar's role as the dominant reserve currency generates strong demand for dollar-denominated assets, a capital account surplus and current account deficit, and dollar appreciation that shifts the US economy toward services and financial rents while squeezing tradeable goods production. The author argues this arrangement benefits financial elites and widens inequality.

Yakov Feygin Phenomenal World
Date Posted:
June 8, 2020
Is Database:
Database

The US is experiencing a financial “Dutch Disease” due to its role as the issuer of the dominant reserve currency, the dollar.

Does reserve currency status shift the economy toward finance and widen inequality?

Core argument: The author argues the US suffers a financial "Dutch Disease": the dollar's reserve-currency status drives demand for dollar assets, producing a capital account surplus and an offsetting current account deficit.

The US is experiencing a financial "Dutch Disease" due to its role as the issuer of the dominant reserve currency, the dollar. This status leads to a high demand for dollar-denominated assets, resulting in a capital account surplus and a current account deficit. The appreciation of the dollar since the 1980s, despite a declining US share of global GDP, has shifted the economy towards services and financial rents, squeezing out tradeable goods production. This has contributed to rising costs of non-tradable goods like healthcare and education, low inflation, and increased economic insecurity. The system benefits financial elites while exacerbating income inequality and economic stagnation. The global demand for dollars imposes higher costs on the US economy now than in the post-war era when the non-US share of global GDP was smaller. This arrangement reflects transnational class politics rather than national interests, with elites across countries benefiting from the status quo.

Takeaways by Macro Roundup® AI

  1. The author argues the US suffers a financial "Dutch Disease": the dollar's reserve-currency status drives demand for dollar assets, producing a capital account surplus and an offsetting current account deficit.
  2. Dollar appreciation since the 1980s, even as the US share of global GDP declined, has shifted the American economy toward services and financial rents while squeezing out tradeable goods production, according to the author.
  3. The author contends the dollar system raises costs of non-tradables such as healthcare and education, holds inflation low, and benefits financial elites across countries while worsening income inequality and economic insecurity.

Highly imperfect blog post, but a good turn of phrase, "...Demand for high quality dollar-denominated assets saddles the United States with a financial ‘Dutch Disease’..."

"... The US suffers massive negative economic consequences from its position as issuer of the dominant reserve currency—the effects of which are unevenly distributed. Demand for high quality dollar-denominated assets saddles the United States with a financial ‘Dutch Disease’; a situation in which the reliance on exporting a single commodity raises the exchange rate and thus squeezes out the production of tradeable, value-added goods in favor of services and financial rents....For the United States,this single commodity just happens to be the dollar. The mechanism behind this process is not hard to understand. From the point of view of simple accounting, every asset must be matched by a liability. That means that a surplus on the capital account—or the desire of the world to purchase safe, US dollar-denominated, assets—is offset by a deficit on the current account. Thus, the United States budget deficit and its trade deficit are both endogenous to the dollar system. When US budget deficits fall either as the result of an increased trade surplus, or the cutting of the budget, financial risk increases as markets substitute safe US government debt for risky collateral, such as the infamous mortgage backed securities of the 2008 crisis. The most visible cost of the disease is the steady appreciation of the dollar since the 1980s, despite a falling US share of global gross domestic product. The main domestic symptom has been the rising costs of non-tradable goods—such as medicine, real estate rents, and education—over tradable goods. This disconnect is at least in part responsible for the country’s low rate of inflation, falling wage share, and increased economic insecurity despite access to a wider range of consumer goods...It is hard to see how the US is economically benefiting from this system. In the early post-war years, it might have been true—in a narrow, arithmetic sense—that this arrangement was, economically, a net benefit for the United States. The cost of having a reserve currency was smaller after the war, simply because the non-US share of global GDP was considerably smaller than it is now. In the present, however, now that the American share of a larger pie is relatively smaller, the costs of the global demand for dollars are higher. Most other governments would, in fact, actively discourage substantial and sustained purchases of their currency...."

Yakov Feygin and Dominik Leusder, "The Class Politics of the Dollar System,"Phenomenal World, May 1, 2020, https://phenomenalworld.org/analysis/the-class-politics-of-the-dollar-system

The Class Politics of the Dollar System

The global dollar system has few national winners. The typical frame for understanding the US dollar is that of “exorbitant privilege.” But the role of the dollar in structuring the international financial system and defining the relationship between a hegemonic US and the rest of the world is ambiguous—as is the question of who exactly benefits from the current arrangement. Dollar primacy feeds a growing American trade deficit that shifts the country’s economy toward the accumulation of rents rather than the growth of productivity. This has contributed to a falling labor and capital share of income, and to the ballooning cost of services such as education, medical care, and rental housing. With sicknesses like these, can we say for certain that the reserve currency confers substantial benefits to the country that provides liquidity and benchmark assets denominated in that currency?

For the rest of the world, the ills are clear enough. In developing countries, the need to insure their economies against currency crises and debt deflation has meant the accumulation of dollars at the expense of necessary domestic investment. These policies are usually accompanied by a suppression of consumption and incomes to establish a permanent trade surplus vis-à-vis the dollar system. And in many countries, the dollar system allows corrupt elites to safely transport their ill-gotten earnings to global banking centers located in jurisdictions with opaque ownership laws.

A closer look at the underlying dynamics that sustain this arrangement reveals why seemingly no one wants to ‘buck the dollar’ but why all countries, including the US, have an interest in doing so.

Rather than viewing the dollar system as primarily a national tool of the United States government, we should understand it as a consequence of a globalized economy that privileges the preferences of financial elites for the free, international movement of capital. The system rests not on uniformly active support for the dollar as a global currency, but on the absence of robust international monetary governance and accommodations to international money markets. The dollar’s present centrality does not come from the priorities of United States national security or interests. Rather, it is rooted in the preferences of private actors in the global money market that mediates between financial institutions, political and business elites, and states. Traditional views of Westphalian sovereignty are not sufficient to explain the cleavages caused by the dollar in the ‘matrix’ of interlocking balance sheets that make up the global financialized economy. While the dollar system has undoubtedly had a disproportionately negative effect on developing countries, the main fault lines that emerge from the dollar system are along class, rather than national lines.

In this context, it might be tempting to retreat to national boundaries and to advocate for de-globalization of various kinds. However, the fact that the dollar system is primarily based on social, rather than geopolitical conflict means that the best solutions suggest at a reform of the system in a manner that empowers people at the bottom of the global social hierarchy.

The Contours of the Dollar System

The global accumulation of wealth and payments for trade and other transactions are largely denominated in dollars, making it the dominant currency for credit and invoicing. Because most of the entities operating in this system do not fall within the purview of the Federal Reserve, most dollars are supplied via offshore interbank credit, funded by dollar deposits at non-US banks, or ‘eurodollars’. These offshore transactions require safe, dollar-denominated collateral to manage their liquidity—preferably United States Treasury debt. Zoltan Pozsar has long highlighted this feature of the offshore financial plumbing, warning of a ‘black hole’ in the dollar funding market. Offshore dollar pools depend on the liquidity of treasuries and near substitutes as collateral to raise cash in the event of a margin call.

The reason for these dollar pools is twofold. First is the need to fund trade. The Eurodollar system facilitates trading relationships between countries with different currencies by giving them access to a common stable currency in which to denominate trade—the dollar. Dollar credit allows the execution of contracts without actual, US-issued currency being exchanged. Instead, the system functions as an exchange of IOUs to deliver receipts at various periods of time. Banks in major money centers clear this system of credit using a combination of time accounts and, if necessary, repurchase agreements to obtain dollars via short-term loans typically collateralized by US treasury debt.

Because 80% of trade in emerging market economies is denominated in dollars, firms with receipts in a domestic currency acquire unsustainable debt in dollars if the domestic currency falls. For this reason, central banks attempt to stockpile dollar assets, most commonly US debt. To acquire them, they usually run a persistent trade surplus by repressing the real wages of their workers. This might be sustainable in the short run, but in the long run it leads to periods of economic stagnation, or international trade and currency wars.

The second driver of these offshore dollar pools is wealth inequality and outsized corporate returns. Large corporations, pension funds, and extremely wealthy individuals cannot bank their money in the retail banking system. Instead, they hold them in pools of dollar liquid denominated assets that can be converted into dollars quickly. While this ‘shadow banking’ system has legitimate uses, it also facilitates tax evasion and kleptocratic corruption. The repression of real wages only compounds this trend. Ubiquitous global trade imbalances drive more returns to owners of capital, increasing inequality.

The dollar system thus facilitates and fuels the power of elites who have an interest in maintaining the status quo. A globalized system with a dominant key currency aids the accumulation of rents at the expense of higher consumption from workers in exporter countries and the hoarding of those rents in the legal black hole of offshore finance.

A financial Dutch disease

The fracture between elite beneficiaries and working losers under the dollar system exists within the United States as well. The US suffers massive negative economic consequences from its position as issuer of the dominant reserve currency—the effects of which are unevenly distributed. Demand for high quality dollar-denominated assets saddles the United States with a financial ‘Dutch Disease’; a situation in which the reliance on exporting a single commodity raises the exchange rate and thus squeezes out the production of tradeable, value-added goods in favor of services and financial rents. Classic examples of countries where ‘Dutch disease’ has taken place have usually been commodity exporters such as Holland in the 1970s (after the discovery of North Sea Oil) as well as Nigeria and Russia. Dutch diseased economies often result in a shrinking, narrow elite whose power rests on income from sales of the single commodity, or the services and management that bloom around the cash flows generated by this commodity.

For the United States, this single commodity just happens to be the dollar. The mechanism behind this process is not hard to understand. From the point of view of simple accounting, every asset must be matched by a liability. That means that a surplus on the capital account—or the desire of the world to purchase safe, US dollar-denominated, assets—is offset by a deficit on the current account. Thus, the United States budget deficit and its trade deficit are both endogenous to the dollar system. When US budget deficits fall either as the result of an increased trade surplus, or the cutting of the budget, financial risk increases as markets substitute safe US government debt for risky collateral, such as the infamous mortgage backed securities of the 2008 crisis.

The most visible cost of the disease is the steady appreciation of the dollar since the 1980s, despite a falling US share of global gross domestic product. The main domestic symptom has been the rising costs of non-tradable goods—such as medicine, real estate rents, and education—over tradable goods. This disconnect is at least in part responsible for the country’s low rate of inflation, falling wage share, and increased economic insecurity despite access to a wider range of consumer goods. While the American consumer can now purchase an ever expanding set of appliances, electronics, and small luxuries, services that are necessary for economic mobility and household sustainability are increasingly out of reach.

It is hard to see how the US is economically benefiting from this system. In the early post-war years, it might have been true—in a narrow, arithmetic sense—that this arrangement was, economically, a net benefit for the United States. The cost of having a reserve currency was smaller after the war, simply because the non-US share of global GDP was considerably smaller than it is now. In the present, however, now that the American share of a larger pie is relatively smaller, the costs of the global demand for dollars are higher. Most other governments would, in fact, actively discourage substantial and sustained purchases of their currency.

If this system is so sub-optimal, why is it still in place? The answer is that it is the locus of a new kind of transnational class politics.

The class politics of dollarization

Frameworks for understanding the persistence of the dollar system tend to vary from from reductionist to outdated, often examining international politics with discrete nation states as the main unit of analysis. In this view, the dollar is a product of hegemonic US interests, wielded as a tool of statecraft. But global financialization has upended this framework: elite interests are not aggregated domestically but internationally, and are transmitted via the balance-of-payments mechanism and the financial system. US leaders and technocrats do not directly compel developing countries to invest their balance-of-payments inflows into Treasuries; nor is it really the active decision making of, say, the People’s Bank of China that’s led to the accumulation of Chinese dollar reserves.

Let us assume that Chinese authorities wanted the People’s Bank of China to reduce its dollar holdings. In order to resolve their external imbalance with the US, they would need to resolve their domestic imbalances. That is because basic accounting identities hold that everything not consumed domestically is saved; those savings are then ‘exported’, largely to the United States, in the form of capital flows. As Michael Pettis has consistently argued, the low household share of income in China (high levels of income inequality caused by rapid growth) have led to a high domestic savings rate and underconsumption. Too great a share of the national income is in the hands of high-saving entities with dollar liquidity preferences, such as high net worth individuals and large corporations. To reverse this imbalance, income would have to be transferred from these powerful interests to China’s workers—a dynamic described by Albert Hirschman as early as 1958. Barring a drastic redistribution of income, perhaps the People’s Bank could simply seek out another reserve currency and an equivalent safe asset. But neither of these would be forthcoming, since no country other than the US has deep, liquid markets in a benchmark asset.

The implicit assumption here, however, is that the financial sector and corporate elites actually want an alternative. There is no reason to believe that this is the case. The system, as it is constituted, does not have many disadvantages for current entrants, and any alternative would require a distributional shift. China’s vast dollar reserves illustrate how emerging market economies with domestic imbalances caused by years of lopsided growth can use dollar-denominated assets as a politically convenient method of maintaining growth without having to resort to intersectoral transfers—from, say, profits to wages. Developed world exporters like Japan and Germany also maintain a growth model based on cost competitiveness and wage suppression. An increased role for the Euro or the Yen would undercut these models. For resource exporters, it facilitates corruption and tax evasion through simple capital flows. In the United States, it benefits financial industry elites, who can reap the rewards from intermediating capital inflows into US markets, while the cost of non-tradable services like tuition, healthcare and real estate rises for everyone else. Across all countries, elites win.

The preference of global elites, and therefore global markets, for the dollar system demonstrates the futility of applying a Westphalian framework to the global financial system. Herman Mark Schwartz, one of the foremost experts on the dollar and American hegemony, offers a better way to think about the dollar—namely, as the state money of a quasi-imperial global system, in which the different economic regions are tied together by a shared reserve currency. This ‘imperial currency’ is more of a by-product, and less of an enabler of (or even an enabling constraint on) American expansionism and military adventurism, both of which preceded the reserve currency status of the dollar.

Two clear geopolitical advantages accrue to the US because of its reserve currency status: dollar liquidity swap lines, and the dreadful power of American sanctions. But the ability of the US to wield that power has been built ad hoc, over several decades, and in periods of great contingency. Recent research shows the international dollar system was not purposely designed, but rather assembled by elites who believed that international money markets must not be actively structured toward a notion of the common good, but backstopped. The system of swap networks that we associate with the 2008 financial crisis had its origins in efforts to backstop the eurodollar as early as the 1960s, and a decision by leaders that it would be better to facilitate it than to fight or restructure it. As long as domestic inequalities are not resolved at the expense of these elites, the dollar will remain hegemonic.

The source of the Federal Reserve’s power over the eurodollar system—and the vulnerability of emerging markets within it—is the global reliance on central bank backstopping. In the 2008-9 crisis, the Fed deployed so-called central bank liquidity swap lines to backstop the global system. These took the form of reciprocal currency arrangements between central banks: The Fed replenished the dollar reserves of other central banks in exchange for local currency. The real power of the swap lines is not who gets them but rather who doesn’t. In a recent piece for the Nation, Andres Arauz and David Adler highlight how these swap lines can be used for a form of monetary triage, in which the United States decides which countries have better prospects for weathering economic storms. However, the Covid-19 crisis has thrown even this into doubt. Not only has the Fed extended its swap support to a wider range of countries than in 2008 and 2009, but on March 31, 2020, it opened a repo facility with foreign international monetary authorities (FIMA). The FIMA Repo Facility allows other central banks and other monetary authorities to directly exchange their Treasury securities for dollars, thereby avoiding having to sell their Treasuries outright into an illiquid market. In doing so, the Fed created an additional source of dollar liquidity for any central bank.

Reforming the dollar system

Dedollarization seems like a distant prospect. There is no equivalent euro-denominated safe asset, for instance, and capital markets in the eurozone are not as developed as those of the US. Attempts to deepen capital markets and introduce a common debt instrument have been dealt repeated blows by EU countries belligerently opposed to financial risk sharing. The recent scuttling of the ‘coronabond’ proposal provides ample testimony on this dynamic. As long as countries like Germany and the Netherlands remain firm in their opposition to necessary financial integration in the eurozone, the currency composition of international reserves will remain heavily skewed towards the dollar. The political prospects for creating Bancor, a synthetic currency first proposed by John Maynard Keynes, are equally bleak.

Instead, we should opt for managing the current system to mitigate its harms, a process in which the United States must take a leading role. We have some proposals.

First, the United States should offer its trade counterparties direct access to the Federal Reserve balance sheet via institutionalized swap lines that are part of trade agreements. The United States should give its partners access to high quality dollar liquidity in exchange for maintaining a balanced trade policy. This tradeoff would decrease the American trade deficit, while placing upward pressure on the real wage in trade counterparties.

Secondly, as Nathan Tankus recently suggested, the Federal Reserve can extend its swap line to the International Monetary Fund (IMF). This would allow the IMF to act like a global fiscal policy maker by issuing so-called special drawing rights (SDRs). In their current form, SDRs are largely illiquid and cannot be converted into dollars or even other currencies in which emerging market debt is denominated. Providing swap line backstops to SDRs is a politically expedient way of using the institutions we already have to ensure that SDRs are actually redeemable in dollars. Tankus’ proposal has been advocated in a letter to the G20 signed by many world leaders under the leadership of former UK Prime Minister Gordon Brown.

Thirdly, the United States should begin to view its deficit not as a problem but as a public resource, and to manage it like energy exporters use sovereign wealth funds to avoid Dutch Disease. To administer this public good, the US should establish a series of public banks to fund specific economic investment initiatives. The Federal Reserve would guarantee the debt of these institutions by discounting it at a penalty rate for reserves or United States Treasury debt or dollar reserves. These securities could thus trade at a slightly higher yield than treasuries and provide investors with an alternative product to general purpose treasuries. The liabilities of these investment vehicles would provide global collateral and promote financial stability while also offsetting the effects of dollar hegemony on domestic industry via permanent, active investment.

But the right set of tools are not enough. To go beyond managing the status quo, we need to first recognize that the dollar system evolved not as a tool of imperial statecraft, but as the project of a transnational elite that has effectively usurped control of an international public good. As long as active confrontation with elite interests remains wanting, the dollar system will persist as a zero-sum game—a state of affairs that, in the long run, is unsustainable for the global political economy. And, following Herbert Stein’s quip: that which is unsustainable will not be sustained.

  • Savings Glut/Trade Deficit
  • GDP
    • Trade (not deficits)
Previous articleJune 8, 2020A Viral Market Update IX: A Do It Yourself S&P 500 ValuationERP for S&P 500 peaked at 7% in mid-March 2020, reflecting heightened market uncertainty & risk aversion. By June 1, 2020, ERP had decreased to 5.3-5.5%, yet remained above pre-crisis levels.Next articleJune 8, 2020The Economic Situation Of First And Second Generation Immigrants In France, Germany And The United KingdomFrance: 2nd-gen immigrants show worse job outcomes vs 1st-gen, unlike Germany/UK where gaps stay stable. Women’s employment gaps narrow across all 3 nations. Points to distinct French integration policy challenges.
Showing 114 database articles primarily about Savings Glut/Trade Deficit

How To Buy A Trade Surplus

AI Summary. Regression evidence suggests governments can buy current account surpluses: raising the fiscal balance by $1 tends to raise the current account by about $0.30, while issuing $1 of domestic-currency debt to buy foreign-currency assets raises it by roughly $0.50-$0.60. Combining a fiscal surplus with foreign-currency investment, as Norway and Singapore do, yields about $0.80 per $1.

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¢.

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

Core argument: Regression results suggest that raising the fiscal balance by $1 tends to raise the current account by about $0.30.

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

  1. Regression results suggest that raising the fiscal balance by $1 tends to raise the current account by about $0.30.
  2. 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.
  3. 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.

Related Articles:

  • Understanding Global Imbalances — The US, China, Germany, and Japan account for roughly two-thirds of global current account imbalances, with the US deficit at 4% of GDP financed by capital inflows into dollar assets. The average duration of a surplus or deficit spell roughly doubled since the 1980s, building large net foreign asset and liability positions.
  • The U.S. Trade Deficit: Myths and Realities — Taxing capital inflows would weaken the dollar but could raise domestic interest rates and depress investment, harming long-term growth, while an interest rate cut absent recession would be inflationary and erode any real depreciation needed to durably improve the trade balance. Fiscal restraint could weaken the dollar and reduce the trade deficit.
  • The Dangerous Triumph Of Neo-Mercantilism — Neo-mercantilism is thriving in both China, which pairs infant-industry promotion with large trade surpluses, and in a United States focused on external deficits and protecting domestic markets. The author argues this will likely fracture the world economy, and that a new multilateral treaty could include a mechanism to combat large structural trade surpluses.
  • Savings Glut/Trade Deficit
  • GDP

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

AI Summary. Foreign holdings of U.S. financial assets are valued at $69tn versus $41tn of U.S. holdings abroad, a gap that has been mounting for decades. With the net liability position in interest-bearing assets at -$15tn, a 1 percentage point rise in interest rates would subtract $150bn from the U.S. net investment income balance.

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.

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

Core argument: 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.

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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • Understanding Global Imbalances — The US, China, Germany, and Japan account for roughly two-thirds of global current account imbalances, with the US deficit at 4% of GDP financed by capital inflows into dollar assets. The average duration of a surplus or deficit spell roughly doubled since the 1980s, building large net foreign asset and liability positions.
  • Tariffs and “International Payments Problems” — Foreigners are accumulating more financial claims on Americans than Americans are on foreigners across direct investment, stocks, bonds, currency, deposits, and loans, and the U.S. net international investment position has moved from -20% of GDP in 2010 to -89%. Almost all of that swing reflects valuation gains on U.S. stocks rather than added borrowing.
  • Foreigners Rebuff ‘Sell America’ and Buy a Net $1.6 Trillion in Assets — Treasury Department data show overseas investors bought a net $1.55tn of long-term US financial assets, up from $1.18tn the prior year, including $720bn in equities and just under $409bn in Treasury notes and bonds. China was a net seller of $208.6bn, with its Treasury holdings ending at $683.5bn.
  • Savings Glut/Trade Deficit
  • Monetary Policy

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

AI Summary. Foreign official purchases of dollars are too small to mirror the US current account deficit, and net official financial inflows have fluctuated around zero even as the deficit widened; the euro area runs a current account surplus despite the euro's reserve role. The author argues materially reducing the US fiscal deficit is the key policy prerequisite for global rebalancing.

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.

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

Core argument: 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.

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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • US Notches One of Its Biggest Annual Trade Gaps Since 1960 — The US goods and services trade deficit reached $901.5bn for the year, one of the largest in data going back to 1960. US companies increased imports of computers and accessories by nearly $145bn from the prior year, an acceleration in demand that reflects large-scale artificial intelligence investment.
  • The U.S. Trade Deficit: Myths and Realities — Taxing capital inflows would weaken the dollar but could raise domestic interest rates and depress investment, harming long-term growth, while an interest rate cut absent recession would be inflationary and erode any real depreciation needed to durably improve the trade balance. Fiscal restraint could weaken the dollar and reduce the trade deficit.
  • Pettis on Obstfeld — Pettis argues that saving rates in China, Japan, South Korea, Germany, Russia and Saudi Arabia are driven by their own domestic policies and conditions, and in turn drive the US saving rate. He notes the US has an open capital account, deep financial markets, and limited intervention in credit allocation.
  • Savings Glut/Trade Deficit
  • China
  • Fiscal Policy
    • Fiscal Deficits
  • GDP

Understanding Global Imbalances

AI Summary. The US, China, Germany, and Japan account for roughly two-thirds of global current account imbalances, with the US deficit at 4% of GDP financed by capital inflows into dollar assets. The average duration of a surplus or deficit spell roughly doubled since the 1980s, building large net foreign asset and liability positions.

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.

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

Core argument: 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.

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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • The Dangerous Triumph Of Neo-Mercantilism — Neo-mercantilism is thriving in both China, which pairs infant-industry promotion with large trade surpluses, and in a United States focused on external deficits and protecting domestic markets. The author argues this will likely fracture the world economy, and that a new multilateral treaty could include a mechanism to combat large structural trade surpluses.
  • Debt, Deficits & Global Imbalances — Taxes or restrictions on short-term capital inflows were argued to be a more direct and potentially superior tool than tariffs for shrinking the trade deficit, since tariffs risk retaliation and supply-chain distortions. Proponents said such measures could reduce reliance on household and government borrowing to sustain employment, if paired with efforts to strengthen domestic demand and tradables capacity.
  • US Notches One of Its Biggest Annual Trade Gaps Since 1960 — The US goods and services trade deficit reached $901.5bn for the year, one of the largest in data going back to 1960. US companies increased imports of computers and accessories by nearly $145bn from the prior year, an acceleration in demand that reflects large-scale artificial intelligence investment.
  • Savings Glut/Trade Deficit
  • China
  • GDP
    • Financial Markets
    • Trade (not deficits)

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

AI Summary. Chinese banks, funded by low-cost domestic money amid monetary easing and weak domestic credit demand, are expanding cross-border lending and undercutting global rivals for sought-after Asian borrowers. Bankers at international institutions say they are being priced out of some of these deals.

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.

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

Core argument: 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.

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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • The Dangerous Triumph Of Neo-Mercantilism — Neo-mercantilism is thriving in both China, which pairs infant-industry promotion with large trade surpluses, and in a United States focused on external deficits and protecting domestic markets. The author argues this will likely fracture the world economy, and that a new multilateral treaty could include a mechanism to combat large structural trade surpluses.
  • The True Cost of China’s Falling Prices — Prices fell for 51 of 67 consumer items tracked over a two-year period in China, while the broader GDP deflator, which includes upstream sectors, declined for 10 straight quarters, indicating deflation is more entrenched in industry. The share of "zombie" firms whose profits cannot cover debt interest rose from 19% to 34% over five years.
  • China’s Trade Surplus, Part I — China's very high investment rates, combined with a shrinking workforce and slowing productivity, produce sharply diminishing returns, making its decades-old high-savings, high-investment growth model unsustainable. The author argues China's leaders resist a pivot toward consumption because of ideology and geopolitical ambition, with the leadership rejecting welfare spending as breeding dependency.
  • Savings Glut/Trade Deficit
  • GDP
    • Financial Markets

Tariffs and "International Payments Problems"

AI Summary. Foreigners are accumulating more financial claims on Americans than Americans are on foreigners across direct investment, stocks, bonds, currency, deposits, and loans, and the U.S. net international investment position has moved from -20% of GDP in 2010 to -89%. Almost all of that swing reflects valuation gains on U.S. stocks rather than added borrowing.

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.

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

Core argument: 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 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

  1. 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.
  2. 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.
  3. 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.

Related Articles:

  • The US Trade Deficit and Foreign Borrowing — The authors argue US trade deficits persist because foreign investors find US financial assets attractive, but the current deficit level is not sustainable. They estimate that stabilizing the US net foreign liability position requires improving the trade balance by about 2% of GDP, or over 3% if low-cost borrowing privileges are lost.
  • The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States — The authors document that the U.S. net foreign asset position fell by 60 percentage points of U.S. gross domestic product between 2007 and 2021, even as U.S. current account deficits narrowed. They attribute this to a boom in the market valuation of U.S. corporations' non-financial assets, which mechanically raised the value of large foreign equity holdings in U.S. firms.
  • United States’ Changing Net IIP — The United States' net international investment position deficit—the gap between foreign-owned US assets and US-owned foreign assets—is the largest on record and has turned negative across all major asset categories. Because much of the liability is equity, the author argues rebalancing could come through a correction in US equity values rather than a weaker dollar.
  • Savings Glut/Trade Deficit
  • Fiscal Policy
    • Taxation
  • GDP
    • Financial Markets
© Copyright 2026 Coherent Research Institute · All Rights Reserved · Privacy · Terms