Does a Reserve Currency Require Trade Deficits?
Is America doomed to permanent trade deficits because we are the world's reserve currency?
This is something called the Triffin Dilemma, and it's been making the rounds since Trump's worldwide tariffs.
The Triffin Dilemma
In short, Triffin says that if you're the reserve currency, the rest of the world needs dollars. And they can only get them by selling you more stuff than you sell them.
That surplus gives them excess dollars, which they save or use to back their banking system.
A number of commenters I normally respect have used this to criticize Trump, saying we have to run deficits, so Trump is doomed to fail.
This is false.
Because there's two ways for, say, Japan to get ahold of dollars. One is sell us more cars. The other is sell us their companies, real estate and family jewels.
If they sell us more cars we lose car jobs. But if they're selling us their companies — or, heck, their farmland — we get rich.
America Ran Surpluses until the 1970’s
Interestingly, in the past 4 decades the capital has actually gone against us -- foreigners own far more of America than we own of them.
So not only does reserve currency status not require trade deficits. Our self-destructive trade policies have actually given foreigners too many dollars.
To the point China and others park trillions in everything from treasuries to American farmland.
We can look to history for what a smart reserve currency policy looks like:
The US itself did not have trade deficits until the 1970's. And we were very much the world reserve currency in the 50's and 60's.
In fact, way back when the dollar hit reserve status around the 1870’s is precisely when our trade surpluses took off.
How did we do it? By amassing overseas assets.
By the mid-sixties we owned about 10% of GDP more than we owed — about $3 trillion in modern terms.
Which translates into about $200,000 per household in modern terms.
Instead, today we owe foreigners roughly 9 times that.
Britain in the 19th Century
Even more dramatic, in the 1800's the British pound was the world's reserve currency, since Britain was fond of colonizing continents.
By 1913 the UK had amassed roughly 160% percent of GDP according to prominent economic historian Angus Maddison.
These included railroads criss-crossing every country on earth. Massive oilfields in Persia and Arabia. Diamond mines across Africa and sugar plantations across the Caribbean. And, of course, the Suez Canal.
In modern US terms that's equivalent to a $50 trillion surplus -- close to half a million per household.
Instead, today the US is a net debtor -- foreigners own more of us -- to the tune of negative 26 trillion.
And it got worse by 6.4 trillion in 2024 alone.
How much do we Owe?
In raw dollars, Americans own about 36 trillion overseas -- half in foreign stocks and bonds, a third in foreign subsidiaries, factories, and real estate.
The rest is loans and bank deposits.
Meanwhile foreigners own 62 trillion in this country -- twice as much. They own three times as much in US businesses and property.
Along with enough Treasuries that markets panic if China sells any.
26 trillion comes to roughly $200,000 dollars per American household that we're in hock to foreigners.
What’s Next
A reserve currency is a wondrous thing -- it means foreigners give us cool stuff in return for paper we print in the Federal Reserve's basement.
But after a half-century of politicians -- and unions -- treating manufacturing as an ATM while selling it down the river in bad trade deals, that reserve currency turned against us. It exported our jobs and pawned the entire country to foreigners.
Our trade problems are not caused by the dollar.
They’re caused by corrupt politicians.
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Decades of socialist propaganda in our schools have led the general public to the belief that ownership of anything outside of this country is an inherent evil. That’s why relatively reasonable postulates about Denmark and the Panama Canal are met with wild disbelief. Hopefully Trump can keep sledge hammering that perception.
Very well put. ... There's a price for being the world's reserve currency. As you say, if you don't produce the goods or services they want, they will opt for your assets instead.