May 4, 2025
This newsletter issue breaks down the recent trade breakdown (sorry for the pun) and explores some of the nuances of why realigning the global balance of trade is both popular and extremely difficult to do.
It also answers some common questions I get about trade deficits and the dollar’s global reserve currency status. Some of those questions and answers are wonky, but in my view they’re extremely important to understand in the current market environment, and for years to come.
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Trade Deficits 101
Trade deficits occur when a nation imports more goods and services than it exports.
When this occurs for brief periods of time, it’s fine. That happens frequently. There are all sorts of reasons why a nation might have a trade deficit or a trade surplus during a given period of time.
In some rarer cases, even long periods of trade deficits can be okay, as long as the flow of funds that makes up the trade deficit mainly goes towards productive build-out of the country. The key example of this is India, which has run trade deficits for decades. It’s one of the fastest-growing nations, has achieved tremendous economic growth over the past few decades, and overall the trade deficit is not mainly about overconsumption. In this case, the country’s GDP can greatly outgrow its trade deficit, which shrinks the trade deficit relative to GDP over time.
Where a trade deficit does become a problem is when 1) it’s persistent and 2) it’s mainly going toward overconsumption or malinvestment. When both of these conditions are met, the trade deficit is likely to result in significant imbalances, and risks an eventual currency crisis or other economic problem that forces the trade imbalance closed.
The United States has had decades of consecutive trade deficits, and indeed much of it is due to overconsumption. Being the global reserve currency gives it a very long (but not infinite) runway to work with, and by this point some of those consequences are starting to hit at scale.
How the Global Reserve Currency Impacts Trade
When people talk about trade surpluses or deficits, they often focus on policy-level details. Some countries engage in more protectionist strategies, where they try to tariff imports while exporting a lot, and this opens them up to criticism or retaliation from trading partners.
However, underneath all of that is a far more important foundational level that relates to the very nature of money itself.
Ever since 1971, most of the world left the gold standard and began using what was basically the dollar standard. There are around 180 currencies in the world, which is a large enough number that in terms of global trade, it would look like barter if they all swapped their currencies around when trading goods and services. Instead, money has a strong network effect, where liquidity begets more liquidity, and acceptability begets more acceptability, leading to one or two major salable monies rather than countless of them.
As such, the way it works in practice is that the dollar is the foundational money for most of the world when dealing with anything international. It’s the ledger that entities in countries all around the world use for cross-border purposes. In practice, this means four primary purposes.
First, a large portion of international contracts are priced in dollars as their unit of account. If an entity in Japan agrees to buy a set amount of commodities from an entity in Brazil, for example, it’ll often be priced in dollars even though it’s neither of their home currencies. It’s the biggest and most ubiquitous global ledger that they both agree to use.
Second, the dollar is the primary cross-border funding currency. When an entity in Kazakhstan borrows from an entity in China, or an entity in Turkey borrows from an entity in the United Kingdom, for example, those contracts will often be denominated in dollars. In practice, this means there are trillions’ worth of dollar-denominated liabilities outside of the United States, mostly owed to other entities outside of the United States.
Third, most central banks hold significant amounts of dollar assets (typically Treasuries, but it could be deposits or other securities) as reserves to back up their currencies when needed, or to be able to support those aforementioned dollar liabilities when global dollar shortages occur (such as during the pandemic lockdowns of 2020). This is where the dollar gets its title as the “reserve currency”. Additionally, big foreign pension funds and investment funds and sovereign wealth funds tend to hold a lot of US financial assets broadly (stocks, bonds, private equity, and real estate).
Fourth, the dollar is involved in about 90% of foreign currency exchanges. If someone wants to trade Korean won for Egyptian pounds, for example, they typically won’t do that trade directly. It’s likely not a very liquid market. Instead, they’ll trade Korean won for American dollars, and then trade American dollars for Egyptian pounds. The dollar is on one side of about 90% of global currency trades. It’s infeasible for all currencies to have liquid markets directly with all other currencies, but it’s easy for all currencies to have liquid markets directly with the dollar, and thus indirectly have liquid markets with each other.
Most currencies trade relative to each other based on fundamental metrics like interest rate differentials, trade imbalances, and so forth. There are also intangible aspects, such as for example when global market participants don’t have much trust in a given country’s leadership, and thus might sell their currency/assets and weaken their currency.
For the most part, entities around the world don’t hold more foreign currency than they need. If you’re not in Canada, there’s not much of a reason to hold Canadian currency or bonds. Similarly, if you’re not in Egypt, there’s not much of a reason to hold Egyptian currency or bonds. To the extent that anyone outside of the country holds those currencies, it’ll generally be 1) fast-money foreign traders speculating on a trade or 2) foreign entities that are performing some degree of trade or financial interaction with that country.
For example, when I bought a villa in Egypt in 2023, I exchanged dollars for Egyptian pounds, and used those to buy the property. I don’t keep excess amounts in that currency beyond what is needed. When I traveled to Norway in 2024, I exchanged some dollars for Norwegian kroner for pocket money, and various banks automatically converted my Visa card spending from dollars to kroner whenever I charged my card. Even though Norway is a wealthy country, I don’t keep any excess value in Norwegian currency or bonds.
The dollar is different. It’s the main currency that entities around the world do hold for long periods of time. Since the dollar is used for those four previously-described purposes internationally, it means there is excess demand for the dollar by entities around the world above and beyond simply interacting with the American economy or financial assets. All sorts of entities are holding dollar-denominated assets in reserve, holding dollars for global exchange purposes, denominating contracts in dollars, and trying to get their hands on dollars to service their dollar-denominated debts (which represent inflexible demand for dollars). At the individual level, there are plenty of Egyptians that buy physical cash dollars from black market brokers on the streets of Cairo to hold them as savings, and the same is true for people in many other countries.
This means that the dollar tends to be structurally overvalued on a trade balance basis. It trades based on all of the normal fundamentals that other currencies do, but then also has this extra layer of demand at all times, for all these various purposes. Most currencies are primarily used by the country that issues them, whereas the dollar is used globally. This boosts Americans’ import purchasing power and tourism purchasing power, but also makes it far more expensive to make low-margin goods in the United States, even compared to other developed countries. As a result, it pushes open the US trade deficit, and then holds it open.
If the whole world is using dollars for international contracts, reserve assets, cross-border funding, and currency exchange, then it begs the question: where are they getting all those dollars? What is the mechanism for which all of those trillions of dollars are flowing around the world outside of the United States?
The primary answer is that the rest of the world gets them from running a trade surplus with the United States. The US runs trade deficits ranging from around $500 billion to $1 trillion per year with the rest of the world, and those dollars spill out into the rest of the world year after year, which meets the world’s demand for dollars.
Thus, in the case of the United States, the trade deficit and global reserve currency status are inexorably linked. Global reserve currency status overvalues the dollar, and the overvalued dollar boosts our import power and harms our export competitiveness, which results in a structural trade deficit with the rest of the world, and that trade deficit is how the rest of the world gets enough dollars to keep using the dollar as the global reserve currency.
Why Does the World Need More Dollars?
Sometimes when I describe this trade structure, people ask me why the world needs an ever-growing number of dollars. Can’t it make due with the number of dollars it already has?
In a fiat currency system, the short answer is no. Fiat currency systems are primarily based on ever-growing debt levels. They’re like the subset of sharks that have to keep swimming forward or they die, but in this case, they have to keep nominally growing or they collapse. The money supply continuously grows in every country for this reason. The dollars outside of the United States are no different; it’s a debt-based global dollar system, and they need ever-growing numbers of dollars to stay afloat.
Here’s a wonkier description. When a fractional reserve bank lends money, it actually creates broad money in the process. Thus, it increases the ratio of broad money to base money in the financial system whenever a bank makes a loan. However, that act of lending doesn’t make enough extra money to cover the future interest owed on that loan. If I’m a Chinese dollar lender and I lend you $500 million and you will owe me back $700 million in five years, then that opens the question of how you’re going to get that extra $200 million. If you’re a successful corporation then maybe you’ll manage it, but then the question shifts to the system as a whole, since every dollar-indebted entity in the world faces that problem.
Within the United States, there is about $102 trillion in total public and private dollar-denominated debt:
According to data points from the Bank for International settlements, there is additionally about $18 trillion worth of dollar-denominated debt (loans and securities) outside of the United States, of which about $13 trillion is owed by non-banks. Beyond that, there is additional debt in the form of derivatives:
The problem is, there are only about $5.8 trillion base dollars in existence. Just in terms of loans and securities (i.e. excluding the more opaque derivatives market), there are about 20x as many liabilities for dollars, as the number of unlevered dollars that exist. All other types of broad dollars are fractional reserves built on fractional reserves. It’s like a game of musical chairs where there are 20+ kids for every chair, and the music can never be allowed to stop for very long.
If we were running with a more equity-based system rather than a debt-based fiat system, then an ever-growing currency supply isn’t necessary. But that’s not the world we live in currently. Both domestically and internationally, the system needs more and more currency units to keep functioning.
The next question one might ask is: “Well, isn’t that the rest of the world’s problem? Why should Americans care?”
The answer is because there are two sides of the ledger: assets and liabilities. And foreigners have more assets than they have liabilities in aggregate, which gives them power. They ran decades of cumulative trade surpluses, which gave them big stockpiles of assets.
We can roughly quantify it. Entities outside of the United States collectively have about $18 trillion in dollar-denominated debt, which is mostly owed to other non-US countries (like China). However, entities outside of the United States collectively have about $61 trillion in dollar-denominated American assets (stocks, bonds, private equity, real estate, etc).
Usually, the rest of the world services its debts by collecting trade surpluses and trading those dollars around. However, whenever the music starts to stop for one reason or another, dollars outside of the United States can become in short supply, at least relative to the gargantuan amount of dollar-denominated liabilities that exist. Since there are so few actual dollars relative to dollar liabilities, the system only works when dollars flow around with pretty high velocity to wherever they’re needed. When shortage and slowdowns happen, defaults start to occur, and well-capitalized entities can sell American assets to get dollars to service their dollar-denominated debts.
An example of this occurred in March 2020 during the worst part of the pandemic lockdown crisis. An acute dollar shortage emerged as global trade dried up, and so foreign entities began selling Treasuries. Parts of the Treasury market went acutely illiquid, i.e. literally broke. US Treasuries are at the core of the US financial system, so that market breaking and becoming illiquid for an extended period of time would be catastrophic. In response, the Fed opened emergency swap lines with other countries and printed trillions of new base dollars to buy Treasuries and mortgage-backed securities to re-liquify the market.
The Fed described it in their emergency March meeting and their subsequent April meeting.
Here’s March:
In the Treasury market, following several consecutive days of deteriorating conditions, market participants reported an acute decline in market liquidity. A number of primary dealers found it especially difficult to make markets in off-the-run Treasury securities and reported that this segment of the market had ceased to function effectively. This disruption in intermediation was attributed, in part, to sales of off-the-run Treasury securities and flight-to-quality flows into the most liquid, on-the-run Treasury securities.
And here’s April:
Treasury markets experienced extreme volatility in mid-March, and market liquidity became substantially impaired as investors sold large volumes of medium- and long-term Treasury securities. Following a period of extraordinarily rapid purchases of Treasury securities and agency MBS by the Federal Reserve, Treasury market liquidity gradually improved through the remainder of the intermeeting period, and Treasury yields became less volatile. Although market depth remained exceptionally low and bid-ask spreads for off-the-run securities and long-term on-the-run securities remained elevated, bid-ask spreads for short-term on-the-run securities fell close to levels seen earlier in the year.
When the Fed opens swap lines or repo facilities with other countries, it’s not out of the kindness of its heart. It’s to alleviate global dollar shortages for the purpose of protecting the United States’ own capital markets from acute selling pressure. The Fed is basically saying, “please stop abruptly selling US stocks and bonds and breaking our markets, and instead we’ll lend you some dollars during this crisis and also outright print a bunch more, relax.”
So, this whole system is massive, and has no easy way to unwind quickly. Whenever it starts to even briefly unwind quickly, it triggers all sorts of emergency liquidity provisions to avoid breaking the US Treasury market and the associated interbank lending market. Over years and decades it can unwind through a combination of money-printing and defaults, but that’s a very long process.
In recent years (since about 2021), BIS data has shown very gradual currency diversification in terms of cross-border lending:
Slips of Paper for Goods: Not So Simple
Many people assume that the trade deficit works like this: Americans send slips of paper to the rest of the world, and the rest of the world sends us real good and services.
That sounds like a pretty sweet deal for Americans, right? The problem is that this common description misses the next step. What does the rest of the world do with that paper (or more realistically, electronic digits) that they receive?
The answer is that they buy American assets, including stocks, bonds, private equity, and real estate. Stocks and bonds represent the bulk of what they buy.
As a result, over time foreigners own a larger and larger share of US stocks in particular. So, in practice we are not selling worthless papers for real goods and services. We are selling stakes in our valuable appreciating capital assets to buy depreciating goods and services.
That asset accumulation by the wealthier parts of the foreign sector is what gives them a lot of ammo to hurt US markets when they run into dollar shortages. They’ve got a big stockpile of assets that they can sell to get dollars, and they own increasing shares of our companies’ dividend payments and voting rights.
Beneficiaries vs Donors
People have sometimes asked whether being the global reserve currency issuer is good for the United States. The answer heavily depends on where you live in the country and what industry you work in.
The United States is an incredibly large and diverse country. Any one thing is rarely good for everyone. There are usually winners and losers. The fact that most of the world has excess demand for dollars due to their use in international trade, lending, and reserves benefits some Americans at the expense of others.
+Being the global reserve currency benefits Washington DC. They can sanction any country, and their sanctions have a lot of impact. The overvalued currency makes it easier to maintain our 750 foreign military bases. The US can run larger fiscal deficits than its peers without running into bond market repudiation.
+It benefits Wall Street. There is tremendous demand for US securities as nations run trade surpluses and recycle them into US financial assets, and Wall Street is who issues them. Basically anyone in the “dollar export” business is doing well.
+It benefits wealthy and upper-middle-class people who work in tech, finance, healthcare, media, and so forth. Your investments are likely doing well from so many global entities investing in the same stocks you are, and the overvalued dollar boosts your ability to travel and consume. The downsides of the overvalued dollar are generally not impacting your work in these higher-margin industries. I’m in this category as well.
–It hurts people in manufacturing.
–It hurts people in manufacturing-heavy regions (e.g. the “Rust Belt“), such as restaurant operators, and basically any other ancillary service. Thus rather than just having industry-specific impacts, it also has regional impacts.
–If it becomes extreme enough, it can circle back and hurt Washington DC, since an impaired industrial base means the military can’t make missiles or ships or other weapons of war as quickly as some adversaries can, and a large percentage of their weapons’ electronics are made overseas.
Basically, the domestic donors to this system are those in the Midwest and other parts of the heartland, and the domestic beneficiaries of this system are primarily on the coasts and in cities. The system has been increasingly imbalanced in this direction for about four or five decades now. Those imbalances started small, but they’re cumulative.
Wikipedia has a useful map that directly shows this migration of prosperity. Wealth left the manufacturing regions and shifted toward the metropolitan centers in and around Washington DC, New York, Massachusetts, Connecticut, and eastern Pennsylvania. This was the first wave of it, back in the 1980s and 1990s when Japan, Germany, and Mexico were the trade bogeymen rather than China:
The US industry base has stagnated pretty significantly since then:
A True Mandate. But the Execution?
I first wrote about the US structural trade deficit back in 2019, and included a full chapter about it (“Heavy is the Head that Wears the Crown“) in my 2023 book Broken Money. I’ve also talked about it in countless podcast interviews.
One of the aspects I pointed out numerous times was that one of the side effects of a structural imbalance like this is rising political populism. The establishment has this system with a self-reinforcing network effect, but this system has cumulative imbalances, and so over time there rises more pushback against it from those that are on the wrong side of it.
In other words, it’s not just a currency crisis or other economic calamity that can start to reverse it. A major political change can also start to reverse it or at least draw attention to it before then. Many academics in ivory towers look at the numbers and say it’s sustainable for quite a while longer. But political reality can disagree and assert itself earlier, because there is a social/cultural overlay on top of the numbers.
Populist political groups have been steadily gaining voter share in both the United States and Europe, especially ever since the 2008 global financial crisis. This trend manifests itself in different ways, but in the United States the trade deficit has been elevated to a top political subject from relative obscurity a decade ago.
And in particular, the “blue wall” fell. Historically the Midwest has leaned Democrat, but in recent elections that area started to lean Republican. Wisconsin, Michigan, Ohio, and Pennsylvania were all major Rust-Belt industrial states that have faced the brunt of de-industrialization. The ones that were reliably blue are now swing states, and the ones that were swing states are now more reliably red.
I’m an investment analyst rather than a political analyst, but paying attention to political realities is a part of investing successfully. Understanding what a given populace is experiencing and desiring is a key input into determining various probabilities of what will happen.
I would argue that there is a genuine voter mandate to address the structural trade deficit. This is not a made up issue; it has become bad enough that it has entered mainstream politics in a big way. The dynamic of operating the global reserve currency, spilling out tons of dollars to the rest of the world to use for their various financing needs, and them recycling their surpluses into US financial markets has reached a significant tipping point. There’s only so much harvesting from the US industrial base in Michigan and stuffing it into US financial assets in New York that can occur before a lot of people start to want a shift.
However, the next question becomes what is the best way to execute on that mandate? What’s the best way to reduce these imbalances and restore some vibrancy to the US industrial base? That’s where I would argue that the current approach we’ve seen from February through April is unlikely to be successful unless it changes course, for the simple reason that it doesn’t address the root cause.
In political messaging, it’s always easier to blame some outsider, especially when there’s some degree of truth to it. Many countries including China do engage in protectionist or mercantilist trading policies. It’s much harder to try to explain the wonky concept that the US trade deficit is tied to the dollar’s status as the global reserve currency, and that those trade deficits are what supply dollars for the world to use in the first place. That wouldn’t go over well at a political rally even though it’s the more foundational reason.
That’s why the US trade deficit has persisted through multiple foreign bogeymen countries. In the 1980s the main concern from a trading perspective was Japan, and that eventually blew over. Other Asian nations like Taiwan and Singapore rose as big exports hubs in that period as well. Then it was Mexico in the NAFTA era of the 1990s, and Germany as well. Now it’s China, the biggest of all.
The major trade surplus partners with the United States change over time, but they all run on top of the more foundational principle that the current global monetary system is based on the US running structural trade deficits. In other words: Don’t hate the player, hate the game.
The current approach by US politicians, however, is to target the player and erect tariffs against these protectionist policies, while re-asserting that they want the US to remain the sole global reserve currency (i.e. they want the game to stay the same). It’s destined for both friction and pushback since it’s not targeting the root, since the root is 1) optically hard to go after, 2) extremely hard to explain, and 3) comes with real trade-offs.
Stephen Miran, President Trump’s chairman of the Council of Economic Advisors, laid this out in a November 2024 paper called “A User’s Guide to Restructuring the Global Trading System“. He directly tackled the concept that the reserve currency status is now directly competing with the country’s ability to retain a competitive manufacturing base. Miran writes:
The Core Tradeoff
Synthesizing these properties of reserve assets, if there is persistent, price-inelastic demand for reserve assets but only modestly cheaper borrowing, then America’s status as reserve currency confers the burden of an overvalued currency eroding the competitiveness of our export sector, balanced against the geopolitical advantages of achieving core national security aims at minimal cost via financial extraterritoriality.
The tradeoff is thus between export competitiveness and financial power projection. Because power projection is inextricable from the global security order America underwrites, we need to understand the question of reserve status as intertwined with national security. America provides a global defense shield to liberal democracies, and in exchange, America receives the benefits of reserve status—and, as we are grappling with today, the burdens.
He laid out various potential approaches for rebalancing trade while trying to minimize disruptions. While I think some of them are flawed, it’s basically the steelman version of the playbook that the administration is trying to run.
Miran proposed to 1) introduce tariffs to gain negotiating leverage and then 2) agree on a currency accord (Mar-a-Lago Accord) with several nations to intentionally weaken the dollar, similar to the Plaza Accord of 1985 (when Japan was the primary trade enemy):
Such a Mar-a-Lago Accord gives form to a 21st Century version of a multilateral currency agreement. President Trump will want foreigners to help pay for the security zone provided by the United States. A reduction in the value of the dollar helps create manufacturing jobs in America and reallocates aggregate demand from the rest of the world to the U.S. The term-out of reserve debt helps prevent financial market volatility and the economic damage that would ensue. Multiple goals are accomplished with one agreement.
But the term-out of reserve debt shifts interest rate risk from the U.S. taxpayer to foreign taxpayers. How can the U.S. get trading and security partners to agree to such a deal? First, there is the stick of tariffs. Second, there is the carrot of the defense umbrella and the risk of losing it. Third, there are ample central bank tools available to help provide liquidity in the face of higher interest rate risk.
He proposed that the dollar would likely strengthen at first during the tariff phase, and then weaken once the currency accord kicks in. And he suggested that favorable terms can be given to allies, and worse terms can be given to adversaries.
In the paper, Miran also acknowledges the risks of a weaker dollar: inflation and higher borrowing costs. He views a weaker dollar as necessary, but naturally wants to mitigate those downsides of a weaker dollar.
-For inflation, he points out how it can be mitigated with policies that reduce supply bottlenecks, like for example encouraging more oil production so that there aren’t energy price spikes.
-For higher borrowing costs, he figures that deals could be struck with foreign countries to term out their holdings of US government debt, so that they lock in low rates for the long run even as the dollar weakens. We would basically inflate away their reserve assets, in other words. This would be phrased as those countries paying for their share of the security umbrella that the United States provides to the world, and would give them access to more favorable trade agreements and military protection agreements with the US. He also pointed out that the Fed could cap Treasury yields, which would require more direct central bank cooperation.
Miran discusses other methods of dollar devaluation, and they basically point toward global reserve assets becoming more multi-polar in general. In other words, nations might diversify their holdings rather than concentrate so heavily in the US, and there are ways to encourage them to do so. Nations might also make larger use of neutral reserve assets, and therefore Miran argues that gold and cryptocurrencies are likely to benefit from this approach.
One example he proposes is a “usage fee” on US assets. If foreign entities buy a bunch of Treasuries, for example, then some percentage of the interest they would receive could be kept by the US Treasury as a fee. This would either reduce the desirability of foreign entities from holding so many US assets (thus preventing them from excessively propping up the value of the dollar), or would recoup some of the interest expense and reduce the US fiscal deficit:
Second, there may be concern that incentivizing too much movement out of dollar reserve assets can limit financial extraterritoriality, which President Trump has already emphasized he is determined to preserve, and threatened punitive tariffs on nations that stop using the dollar for transactions purposes. Critically, the imposition of a usage fee on foreign official Treasury holdings does not interfere with the usage of the dollar in payment systems, only in the savings function of reserve assets in the official sector; a country with substantial excess foreign exchange reserves can somewhat diminish those reserves without turning to other currencies for facilitating international trade. Moreover, this reinforces why it will be important to move slowly and in small steps with such a policy. Treasury would want to get a good sense of how its policies affect transactions and financial extraterritoriality before taking too much risk with user fees for Treasury holdings, and this argues for gradualism.
Another example he proposes is that the US could print dollars to acquire foreign reserve assets. That comes with risks (including foreign default or devaluation) but is a unilateral method to devalue the dollar even if trading partners refuse to participate in a multilateral approach. The US can do this with gold, too, meaning it can print dollars to buy gold and thus elevate the status of gold as a neutral reserve asset while devaluing the dollar.
While I think the paper is intelligent and well-written, I view it as having some flaws. Specifically, I think it overstates the US negotiating position, and thus is overly optimistic on the idea that the foreign sector will term out their holdings of US debt and accept debasement of their reserve holdings to stay in the good graces of the US government. The rest of the world would view such propositions as “paying tribute to the empire”, and that’s a non-starter for many nations, especially large ones like China and other BRICS nations.
It’s hard to reshore supply chains quickly, especially from China, and so jacking tariffs up very high can hurt us as much as it can hurt them. The US only imports a minority of China’s total exports even including indirects; the the majority of China’s exports go to the rest of the world. Thus while we can harm them via tariffs, it’s pretty hard to cripple them.
And then in addition to the flaws of the paper itself, I think the execution has been messy (at least so far, from February through April). Tariffs were escalated very quickly to unsustainable levels, which makes it easier for other countries like China to call the bluff. In response, the US made all sorts of exemptions for phonemakers and carmakers and so forth, but that benefits big businesses while leaving many small businesses in trouble. In addition, the very products that the US would need to build up its own manufacturing base are themselves tariffed. It takes many years to build up an industrial base, and many of the needed supplies for that are tariffed and thus more expensive.
So, while I do think the structural nature of US trade deficits is becoming a serious problem and needs addressing, I view the current execution approach as raising the risks of a recession and not meaningfully tackling the core issue of the trade deficit itself. We’ll see to what extent the next parts of Miran’s paper are followed, such as a multilateral currency accord or unilateral methods to weaken the dollar. The US does not seem likely to enter that phase with as much negotiating power as Miran hoped.
My Similar Paper on the Subject
While less polished than Miran’s, I put out a similar framework back in 2020 via a 15,000 word article called “The Fraying of the US Global Reserve Currency System“. I later used portions of it for 2023’s Broken Money.
This article discussed the history of the dollar as the reserve currency, how the reserve currency status is hollowing out the US industrial base, how it’s leading to increased political populism, and mentioned various ways to address it including the US accumulating foreign reserves or boosting the importance of neutral reserve assets in the system to shift toward a more multi-polar financial world. That’s where my article and Miran’s paper overlapped.
Since Miran’s paper came four years later where the US is running even higher structural trade deficits, it’s not surprising that he includes methods that are more extreme than I did, such as imposing high tariffs on imports, imposing usage fees on US financial assets, and trying to use the US security umbrella to convince nations to term out their debt even in the face of likely debasement.
The Painful Nuance
One of the reasons why optics around the trade balance are so confusing is that if it’s phrased directly, then addressing it is unlikely to be popular. All of the potentially successful methods to improve the trade balance of the global system are going to feel like eating vegetables or taking medicine for a while.
-If the dollar is structurally weakened with a currency accord, and then further rebalanced with a more multi-polar global reserve approach, then it would help re-shore manufacturing to some extent, but would also hurt financial asset performance and raise the likelihood of consumer price inflation. Who’s going to vote for a poorly-performing 401(k) and higher consumer prices? Miran acknowledges this and provides mitigating variables, but I think those variables are very likely to be insufficient.
-Most new US manufacturing facilities would be heavily automated. While this would benefit national self-sustainability and security, the jobs created from it are likely to be fewer than many people think even though many would indeed be created.
-Reversing a multi-decade trend is going to take many years. It can’t happen overnight. This is because there are significant physical aspects to it: manufacturing facilities, supply chains, increased energy infrastructure to support the new manufacturing facilities, increased internal transportation infrastructure, and so forth.
-Trade deficits don’t generally close in pleasant ways. The typical order of things is that import demand collapses first, and then after economic weakness and currency weakness, the country becomes more competitive for their manufacturers, and thus exports can increase. In other words, the transition process tends to be stagflationary. Who would vote for that?
I view the United States and indeed the global financial system as likely beginning a very long-term transition. Even back when I wrote my 2020 article it was gradually underway, but some things since then kicked it into high-gear. And the way I see it, there are painful parts along the journey no matter what. The status quo is painful for those on the wrong side of the huge imbalance. But the change itself would likely be stagflationary and long-lasting, with no guarantee of success.
Investing Implications
This type of period is inherently hard to invest in, but there are ways to mitigate the risks:
-Shorter duration Treasuries and TIPS offer more safety than long-duration bonds, in my view.
-The highest-quality neutral reserve assets are likely to benefit structurally from the United States’ effort to rebalance its trade and capital balances. I think gold is temporarily overbought and that bitcoin is more attractive with a 12-month view, but I hold both.
-Selling cash-secured puts on stocks you are fundamentally long-term bullish on can pay you to wait for decent entry prices.
-Paying attention to equity valuations can limit downside risks during major rotations. There are years where valuation doesn’t matter, and there are years where it matters significantly. This type of period is where valuations are more likely to matter.
-International equities have been underperformers for the past 15 years, but much like the 2003-2007 period, there’s a reasonable chance of a 3-5 year period of international equity outperformance in the years ahead. Some degree of global diversification can spread out portfolio risks.
Portfolio Updates
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M1 Finance Newsletter Portfolio
I started this account in September 2018 with $10k of new capital, and I dollar-cost average in over time.
It’s one of my smallest accounts, but the goal is for the portfolio to be accessible and to show newsletter readers my best representation of where I think value is in the market. It’s a low-turnover multi-asset globally diversified portfolio that focuses on liquid investments and is scalable to virtually any size.
And here’s the breakdown of the holdings in those slices:
Changes since the previous issue:
- Replaced RTX with TSM.
- Replaced ULTA with AMD.
- Sold gold miners and simplified the commodity producer section.
Other Model Portfolios and Accounts
I have three other real-money model portfolios that I share within my premium research service, including:
- Fortress Income Portfolio
- ETF-Only Portfolio
- No Limits Portfolio
Plus, I have personal accounts at Fidelity and Schwab, and I share those within the service as well.
Final Thoughts: A Path Forward?
Oddly enough, this 2025 period of high volatility and weak performance in US financial assets has been pretty good for my investing approach so far. My portfolios’ performance has positively decoupled from its benchmark to a larger degree than is usual.
For the newsletter model portfolio, I dollar-cost average into it with a real-money account. I measure it in terms of gains over principal. Since it’s a globally diversified multi-asset portfolio, I benchmark it against the iShares Core 80/20 Aggressive Allocation ETF (AOA), which has similar volatility characteristics and overall exposure. In other words, I compare dollar-cost averaging into my portfolio with dollar-cost averaging into AOA on the same days.
The results have been surprising lately (numbers as of April 28th):
This positive performance decoupling is mainly for a few reasons:
-Ever since 2019 (see my bond bubble article), I have minimized long-duration bonds, and instead opted for short-duration bonds and gold for that part of the portfolio.
-Ever since 2020 (see my bullish bitcoin article), I have included some bitcoin exposure in place of some of the equity exposure.
-I separate out some categories that tend to move independently, which improves rebalancing performance. For example, by putting energy/commodity producers in their own category, it means that when they sharply underperformed in 2020 more of my incoming capital was allocating to them (they were underweight) whereas when they spiked in 2022 less of my incoming capital was allocating to them (they were overweight).
-This portion of 2025 has been kind to international equities on a relative basis for a change, which the portfolio has decent exposure to.
While I doubt this type of 4-month performance differential will persist, I do think it shows that there are rather passive asset allocation methods available to ride through periods of economic turbulence and mitigate the damage. They start with being a bit more diversified than a typical stock/bond portfolio, by including some alternatives and some protections against stagflation.
Best regards,
