I've seen a number of recent statements by people suggesting that U.S. fiscal deficits are being driven by (1) the dollar as the reserve currency and (2) relatively low foreign consumption/high foreign savings. These factors, it is suggested, lead to lower interest rates for borrowing in the U.S., and consequently higher levels of U.S. budget deficits and debt, with implications for the trade deficit as well. Let's walk through what exactly people have been saying and then talk about it a bit.
Concerns about the Dollar
First up, we have the issue of the dollar as the reserve currency, where the argument seems to be that reserve currency status creates above market levels of demand for U.S. debt, which leads to lower borrowing costs for the U.S. government, and therefore enables more U.S. government borrowing. Here's an exchange on this issue between Treasury Secretary Scott Bessent and Rep. Barry Loudermilk (R-GA) at a recent House Financial Services Committee hearing (starts at 58:59 of the video):
Loudermilk: You and I are both aware of the paradox of the US reserve currency status. The so called Triffin dilemma says that to maintain the benefits of a global reserve currency status, we may always run a current account deficit, which in turn risks undermining global confidence in the dollar. The US enjoys an exorbitant privilege from the dollar's reserve status. This means that, among other benefits, there is a high demand for dollar dominated assets worldwide, substantially lowering borrowing costs. It also allows us to run sustained trade deficits and drives capital investment into the United States. ...
... does the demand for dollars and the US debt worldwide, and the reduced borrowing costs that come with it, contribute, in a meaningful way, to some of our failings as fiscal stewards?
Bessent: Well, I would say that the unfettered ability to borrow has made us more prolific as there is very little potential for market discipline to date, right? There is the potential that the market may discipline the United States government one day, and I am, along with the administration, President Trump, trying to set the country on a path to avoid that.
A key point here is that, according to Bessent, "the unfettered ability to borrow," as a result of the dollar being the reserve currency, "has made us more prolific [in borrowing]."
Concerns about Relative Savings and Consumption
Next up is the level of savings and consumption. On this issue, you have arguments that I think are two sides of the same coin: Foreigners consume too little and save too much. Their savings makes its way to the U.S. and stimulates borrowing and consumption here. As the Economist recently put it: "It has become increasingly fashionable to believe that global imbalances—notably, China’s excess savings—have forced overconsumption on America. One way they might do this is by artificially depressing global interest rates."
As an example of someone holding this view, here's FT columnist Martin Wolf, in a piece called "The Old Global Economic Order is Dead," talking about the role of the level of foreign savings on U.S. fiscal policy:
... the counterpart of external deficits tends to be unsustainable domestic borrowing. Combined with financial fragility, the latter can lead to huge financial crises, as it did between 2007 and 2015. Sectoral savings and investment balances are revealing indicators of this last challenge. Foreigners have been running a substantial savings surplus with the US for decades. US businesses have also been in balance or surplus since the early 2000s, while US households have been in surplus since 2008. Since these sectoral balances have to add to zero, the domestic counterpart of US current account deficits has been chronic fiscal deficits.
If real interest rates had been high, fiscal deficits might have been driving the chronic external deficits. But the opposite has been true: real interest rates have been either low or very low. The Keynesian hypothesis looks right: the inflow of net foreign savings, shown in capital account surpluses (and current account deficits) made big fiscal deficits necessary, because domestic demand in the US would otherwise have been chronically inadequate.
Wolf is arguing that high foreign savings has led to low interest rates for U.S. borrowers, and "the inflow of net foreign savings ... made big fiscal deficits necessary." The use of the word "necessary" here seems like he is going beyond the argument that foreign savings are a contributing factor to big fiscal deficits -- rather, he seems to be saying that they somehow made big fiscal deficits unavoidable.
And then on low foreign consumption -- which I think is the converse of high foreign savings although it may be more complicated that that -- here's Vice President JD Vance in some recent remarks:
And what the President has said is we must rebalance the global economy vis a vis China. We cannot absorb hundreds of billions of dollars, close to a trillion dollars per year, in annual surplus, most of it coming from the People's Republic of China. And what that's going to mean in the rebalancing is that we think that the PRC is going to have to, frankly, let their own population, consume a little bit more. They've held consumption levels down in order to increase these massive exports.
Also on consumption, President Trump's "Liberation Day" Executive Order ties relative consumption levels to the U.S. trade deficit:
... non-tariff barriers include the domestic economic policies and practices of our trading partners, including currency practices and value-added taxes, and their associated market distortions, that suppress domestic consumption and boost exports to the United States. This lack of reciprocity is apparent in the fact that the share of consumption to Gross Domestic Product (GDP) in the United States is about 68 percent, but it is much lower in others like Ireland (27 percent), Singapore (31 percent), China (39 percent), South Korea (49 percent), and Germany (50 percent).
Foreign consumption levels also came up in the questions for the record for U.S. Trade Rep. Jamieson Greer after he testified before the Senate Finance Committee on April 8. Here is Greer's response to a question from Senator Bernie Sanders:
I do not share the assumption, implicit in your question, that you can attribute manufacturing jobs lost solely due to wage differential. High wage countries can, and often do, engage in unfair trade practices. For example, for years Germany, France, and other European nations illegally subsidized the Airbus Consortium to the direct detriment of US firms. ... These countries are also notorious for abnormally low consumption, necessarily driving them to produce more than they consume and export their lack of demand to the U.S. market to the detriment of U.S. workers.
Global Imbalances and Fiscal Deficits/Debt
OK, so we've seen some of the arguments people are making on the dollar as the reserve currency and on foreign savings/consumption. Let me now try to weave all of this together. If I understand this view correctly, people believe that a combination of one or both of (1) the dollar as the reserve currency and (2) high foreign savings/low foreign consumption, have led to "global imbalances," by which they mean the U.S. current account deficit and capital account surplus. Furthermore, they argue that a large U.S. federal budget deficit and high levels of debt are a consequence.
To assess this, let's start by looking at the U.S. federal budget. I don't follow the U.S. budget process as closely as those who do it for a living, but I am interested in it, I try to read about it as much as I can, and I have some views. From what I can tell, the decisions on taxing and spending that dictate the level of U.S. borrowing are made with only a small amount of regard to the long-term capacity to borrow. Many Republicans seem to believe that cutting taxes, on its own and regardless of what happens with spending, will result in high economic growth, and thus lead to a sustainable level of debt/GDP (if not a balanced budget). And many Democrats seem to believe that higher spending, in the form of "investment" in the economy, will result in high economic growth, and thus lead to a sustainable level of debt/GDP (if not a balanced budget). Based on these views of economic policy, most politicians in both parties generally push for high levels of borrowing.
Now, interest rates must have some impact on the ability and desire of the U.S. government to borrow. Those interest rates dictate the cost of borrowing, and I would hope that these costs are considered by policymakers. From what I can tell, though, these costs are not usually at the forefront of most policymakers' minds when they are making budget choices. Instead, the main factor being considered is their position on the size of government, as seen in political decisions on the level of taxing and spending. Some want to cut taxes and spending (but keep borrowing) while others want to raise taxes and spending (but keep borrowing). In this regard, I agree with how the Economist puts it in terms of the role of foreign behavior and policies: "But in America, a country that accounts for over a quarter of global GDP at market exchange rates, domestic forces almost always matter more than the foreign winds around them. Nobody forces the country to consume too much."
Consumption and Trade Deficits
Turning to foreign consumption levels, the World Bank has some good data comparisons. Here's one comparing the final consumption expenditure per capita of China and Germany (two countries often criticized for saving too much) with the U.S., going back to 1995:
And here's another comparing the final consumption expenditure as a % of GDP for a wider range of countries, going back to 1970:
What I see in both charts is the following: (1) there's a range of consumption levels across countries; and (2) the U.S. is at the high end of consumption. What I don't see is evidence of a correct amount of consumption, or that there is some inherent unfairness in consuming at a particular level.
At the same time, I do understand how different consumption levels can affect trade flows. And I can see how these trade flows should lead to adjustments in currency levels. Ideally, I think you would want to have currency levels that adjust based on market signals to the greatest extent possible. At times, I get the sense that U.S. policymakers want that; at other times, though, it seems like they just want a "strong dollar."
What to make of all this?
Summing up, in my view, the idea that the fundamental cause of U.S. budget deficits/debt is that there's too much money from other countries being foisted on us, which then causes us to borrow too much, is pretty far-fetched. The reality is that the U.S. has a choice about how much to borrow, and it has made a choice to borrow a lot (and based on current U.S. fiscal policy discussions, I don't see that changing any time soon). We can debate whether that choice was and is the right one, but it was the choice made by U.S. policymakers.
With regard to trade and capital flows, relative savings and consumption clearly have some impact, as does the international currency regime. If the U.S. wanted to increase its own savings and reduce consumption, I can see ways to do that; if, on the other hand, it wants to push for lower foreign savings and higher foreign consumption, that seems much more challenging. And on currencies, I can imagine changes to the system that would be of value, but it seems to me that there is strong support from many different constituencies to keep the existing system mostly as is.
Overall, I don't see any big changes coming to the policies involved here, and thus probably no change in the complaints about global imbalances either.
