Matthew Billington
A prominent economist once told me that macroeconomic policy debates are all about the prime mover to which other variables respond. The implication, he explained, is that you can invert policy prescriptions simply by claiming a different forcing variable. A paper by Stephen Miran, published just before he was nominated to chair President Donald Trump’s Council of Economic Advisers, does precisely this. Since his views likely reflect those of the administration, they surely warrant close attention.
The traditional view of why the United States runs chronic trade deficits is that it overspends, owing largely to its fiscal deficits (the forcing variable). But the true forcing variable, Miran argues in the paper, is the rest of the world’s hunger for US financial assets, especially Treasurys. Foreigners want ever more Treasurys for their foreign-exchange reserves and for financial transactions, and the US has had to run large fiscal deficits to meet this exorbitant demand. The resulting capital inflows keep the dollar too strong for US exporters to compete, leading to persistent trade deficits.
The argument is unpersuasive, for several reasons. First, consider the timing. The US started running a steady trade deficit in the mid-1970s. It began running a steady fiscal deficit around the same time, with the exception of the late 1990s, when capital gains taxes and private consumption soared because of the dot-com boom, temporarily shifting the locus of US overspending from government to households.
While foreigners have been buying US financial assets for a long time, and US entities have been repaying the compliment, the “forcing” effect of dollar accumulation by foreign central banks really took off only after the Asian financial crisis of 1997, when East Asian economies, seared by the harsh conditions imposed on them by the International Monetary Fund, built reserves to protect against sudden stops in financing. Again the timing—that is, when large US trade deficits emerged—is off.
If creating financial assets for the rest of the world to buy is such an exorbitant burden, why not allow other countries to shoulder it?
Moreover, the US does not run a uniform trade deficit. Rather, it has a trade deficit in goods and a net surplus in services (of nearly $300 billion in 2024). When economists encounter that kind of pattern, they see orthodox comparative advantage at work, which benefits the US. Apple reaps large profit margins selling the superbly designed iPhone (and its software content) to the world, while Foxconn gets tiny margins manufacturing iPhones in China and India. Even though the overall trade numbers may reflect a large deficit, the US is far from a victim here.
Another problem is that any excess demand for US Treasurys from the rest of the world should show up in a huge excess premium for US bonds. Yet Miran complains that US bond interest rates don’t reflect such a premium, giving the US little benefit from producing high-demand financial assets. This seems strange. Why would such demand for US financial assets hold up the dollar but not push down US bond rates?
The simpler explanation of large US trade deficits is that Congress spends as it wishes, relying on the rest of the world to buy Treasurys to fund what domestic revenues cannot cover. Has there ever been a member of Congress who says the US should run deficits to accommodate the world’s need for Treasurys? If excess demand for US financial assets is really such a problem, Congress can simply run smaller deficits, have foreigners scramble over one another to buy the smaller issuance of Treasurys, and thus orchestrate lower US interest rates (and higher US production).
Moreover, if creating financial assets for the rest of the world to buy is such an exorbitant burden, why not allow other countries to shoulder it? Far from entertaining this possibility, President Trump recently threatened the BRICS group of major emerging economies for even daring to contemplate separate nondollar payment arrangements. While admitting that the US does need foreign money to fund its fiscal deficit (perhaps a tacit recognition that the fiscal deficit really is the primary forcing variable), Miran suggests another reason to have foreigners buy US financial assets and use its financial system: Doing so gives the US more ways to punish foreign countries that step out of line, including, alarmingly, imposing a selective tax on Treasury interest payments.
If the US does not want to give up its exorbitant burden, could import tariffs help US manufacturers overcome an overvalued dollar? As Miran points out, tariffs will partly be offset by a stronger dollar, as was the case in 2018–19, when the US imposed sweeping tariffs on China. But a stronger dollar will hurt US exports, and if prices of imported products in dollars do not change much, it is hard to see how US manufacturers will become more competitive.
Thus, Miran sets his sights on a concerted dollar depreciation, supported with interventions by non-US central banks who will be “persuaded” under the threat of tariffs or a withdrawal of US defense support. But even if such interventions are effective, foreign central banks will have to sell US Treasurys and buy domestic bonds, which will make the US fiscal deficit harder to finance.
Miran should be commended for trying to explain why the US is turning against the system it built. To be sure, the US fiscal deficit is not the only forcing variable. Chinese underconsumption contributes to global trade imbalances. Also, the US has lower tariffs than some of its trading partners, some of which subsidize business more than the US does, and some of which have shown scant respect for intellectual property rights. But these issues are best addressed through negotiations (perhaps supported by implicit threats).
It is not clear where the Trump administration’s current path of “shock and awe” is supposed to lead. The claim that the dollar’s attractiveness is an exorbitant burden rather than an exorbitant privilege is unpersuasive, especially when those making such arguments are so reluctant to give the burden up. Markets are unnerved by the punishment that the administration, convinced that the US is a victim, is willing to inflict on close allies. If such behavior reduces the attractiveness of the dollar, perhaps it really will become an exorbitant burden. But that is not a future that any American should want.
Raghuram G. Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth. This essay first appeared in Project Syndicate. © 2025 by Project Syndicate.
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