INVESTING
late Treasury bills, they don’ t have to run trade surpluses to obtain them. The necessary funds can also be raised by selling existing foreign assets such as stocks, real estate and factories.
That is precisely what happened in the 1960s through the mid-1970s. By then, the dollar had firmly established itself as the global reserve currency, yet the U. S. was almost always running a currentaccount surplus— not a deficit. Foreign investors were accumulating U. S. Treasurys, while American firms expanded abroad by acquiring foreign production facilities, either through direct purchases or“ greenfield” investments, in which they built factories from the ground up.
The postwar era was hardly the only time when the country issuing the world’ s reserve currency ran a current-account surplus. The British pound was the undisputed global reserve currency from the end of the Napoleonic Wars in the early 1800s until the outbreak of World War I in 1914. Throughout that period, the United Kingdom generally ran external surpluses, bolstered by high returns on investments across its colonial empire.
There is another way to interpret the U. S. current-account deficit that helps explain why the relationship between the exchange rate and trade imbalances is more complicated than Miran’ s theory suggests. In accounting terms, a country’ s current-account surplus equals the difference between national savings and investment by both the government and the private sector. Importantly,“ investment”
Miran’ s plan, clever as it might be, is based on a flawed diagnosis. While the dollar’ s role as the world’ s leading reserve currency plays a part, it is just one of many factors contributing to America’ s persistent trade deficits. here refers to physical assets such as factories, housing, infrastructure and equipment— not financial instruments.
When viewed through this lens, it is clear that the current-account deficit is influenced not just by the exchange rate but by anything that affects the balance between national saving and investment. In 2024, the U. S. fiscal deficit was 6.4 % of GDP, significantly larger than the current-account deficit, which was under 4 % of GDP.
While closing the fiscal deficit would not automatically eliminate the currentaccount deficit— that would depend on how the gap is closed and how the private sector responds— it is a far more straightforward fix than launching a trade war. Reducing the fiscal deficit would, however, involve the difficult political task of convincing Congress to pass more responsible tax and spending bills. And unlike a high-profile trade confrontation, it wouldn’ t cause foreign leaders to curry favor with Trump; instead, it would shift media attention back to domestic politics and congressional negotiations.
Another key factor behind the current-account deficit is the strength of the American economy, which has been by far the most dynamic among the world’ s major players in recent years. This has made U. S. businesses particularly attractive to investors. Even manufacturing has grown as a share of GDP. The reason employment has not kept pace is that modern factories are highly automated.
Miran’ s plan, clever as it might be, is based on a flawed diagnosis. While the dollar’ s role as the world’ s leading reserve currency plays a part, it is just one of many factors contributing to America’ s persistent trade deficits. And if the trade deficit has many causes, the idea that tariffs can be a cure-all is dubious at best.
KENNETH ROGOFF, a former chief economist of the International Monetary Fund, is Professor of Economics and Public Policy at Harvard University and the recipient of the 2011 Deutsche Bank Prize in Financial Economics. He is the co-author( with Carmen M. Reinhart) of This Time is Different: Eight Centuries of Financial Folly( Princeton University Press, 2011) and the author of Our Dollar, Your Problem( Yale University Press, 2025).
© Project Syndicate
40 | FINANCIAL ADVISOR MAGAZINE | JUNE 2025 WWW. FA-MAG. COM