Reserve currency

The Big, Beautiful Bill will increase the deficit. 

The national debt will keep growing.

National debt calculator as of 4:53 p.m. PDT yesterday.

Click on this link to see what it is right now. 

Republicans are adamant that the Trump tax cuts of 2017 stay in place. The new Big, Beautiful Bill has a lot of moving parts, but the net effect is to reduce taxes on the top one percent of taxpayers and to reduce benefits and services for Americans in the bottom 40 percent of income. Democrats will try to restore services. Republicans will want to preserve tax cuts. We will continue to have a deficit and the debt will grow.

The debt matters. We pay interest on that debt, and if the world loses confidence in our ability to repay it, the rate of interest will go up, which increases the deficit and therefore raises the debt, which increases the deficit: a death spiral. Since the dollar is the world's reserve currency, other countries bank their money by buying U.S. treasury debt. Most world trade -- even between two countries far from the U.S. such as Bolivians buying Turkish pistachios -- is denominated in U.S. dollars; and then the seller's money is banked using dollars, which might then be used to buy Saudi oil. The "extraordinary privilege" of having our dollar serve as the world's reserve currency means our interest rates are lower than they would otherwise be.

That creates a dilemma. The world needs our debt. We need to avoid being buried in interest payments.

Classmate Jim Stodder taught economics and securities regulation at Boston University. In his early 20s he knocked around as a roughneck in the oil fields. Then he returned to formal studies and received a Ph.D. in economics from Yale. 

Guest Post by Jim Stodder

Trump both wants the U.S. dollar to be dominant and decries the logical consequence. It is impossible for most countries in the world to acquire reserves of U.S. dollars without running current account surpluses with us.

Trump says this means they are ripping us off. High enough tariffs could reduce these trade deficits, but they would also mean the end of the dollar as the world's reserve currency. It is impossible for the rest of the world to maintain large U.S. dollar reserves without the U.S. running persistent deficits on its current account. (The current account is mostly the trade balance on goods and services, but includes profits and interest payments for the 'service' of borrowed money, and unilateral transfers.)

This is known as the Triffin Dilemma. The U.S. can have a current account surplus, OR the U.S. dollar can be the world's reserve currency -- bringing us lower interest rates and cheaper imports from a strong dollar. But we cannot have both.

One attempt to square this circle is to "tax" countries on their U.S. dollar holdings, which are largely in the form of interest-bearing U.S. Treasuries. This has been seriously suggested in a paper by U.S. Treasury Secretary Scott Bessent.

As The Economist magazine notes, the world will regard this as a "default" since it amounts to paying less than the agreed-upon interest on U.S. debt. No one would want to hold large dollar reserves, and we are back to square one.

JD Vance has explicitly decried our reserve currency status -- which he is smart enough to understand -- because it means we are at an international disadvantage in our exports. He is particularly worried about the loss of U.S. manufacturing, since he sees it as creating real jobs for real men who can raise a family as the sole breadwinner.

Only Trump's extraordinary ignorance and the cowardice of the Republican Party cringing before him have allowed our government to demand two impossible things before breakfast. But that is where we are.

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