Posted:May 15, 2025
Categories: China, Economics, Emerging Markets, Fiat Currency, Inflation, Monetary Policy, US Dollar, US Treasuries
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The geopolitical news was positive this week, with several significant events unfolding. The U.S.-China trade negotiations produced a surprise result over the weekend. Both sides appeared eager to reach a deal. Tariffs were lowered, and a 90-day pause was initiated. President Trump signed an executive order to lower pharmaceutical prices, and a $600 billion U.S.-Saudi Arabia AI and defense deal was agreed upon.
While each news story is complex, seeing progress that will hopefully foster peace, further fair trade, and enhance global economic growth is encouraging. Markets rallied this week following the U.S.-China trade deal. As discussed in past articles, the tariff chaos is primarily centered on an agreement being reached between the US and China. The first inning was encouraging. Let’s hope for more to come.
Much of the discussion over the last month has focused on the vast trade and budget deficits the United States has with the rest of the world. In my April article, I argued that the current trade imbalances are centered around the fact that the United States must provide the world with liquidity through U.S. Treasury securities as we hold the current mantle of the global reserve currency.
This article discusses this topic further using a term called Net International Investment Position (NIIP). Figure 1 shows the U.S. NIIP from 2006 to 2024. The most recent reading was -$26 trillion. The NIIP is a macroeconomic measure that quantifies the difference between a country's total foreign assets owned by its citizens and government and the total domestic assets owned by foreign citizens and governments (Alden, 2023, p.153). This is a complex concept, but it can be explained more simply. By “stuff,” this means foreigners own more of our assets: stocks, bonds, and real estate than we own of theirs.
This figure has been negative since the late 1980s, as the United States has run negative trade and current account deficits with the rest of the world. It hasn’t always been this negative, and it was only -$1.5 trillion in 2007. However, following the Global Financial Crisis (GFC), this number plummeted as the United States began attracting enormous global wealth into our economy.
Figure 1: U.S. Net International Investment Position, 2006-2024
Source: FRED, Federal Reserve Bank of St. Louis
The NIIP has several categories, and Figure 2 illustrates the breakdown. The largest, by far, is “Portfolio Investment.” Simply put, this refers to foreigners purchasing our stocks and bonds. This makes sense, as our stock market was undervalued following the GFC in 2009. We also have the deepest and most liquid capital markets in the world. But why has this exploded since the GFC? The United States' propensity to overconsume is one answer. A second answer is the strength of our companies, specifically in the technology sector. A further piece of the puzzle lies in the vast amount of debt that now exists worldwide and the incredible network effect of the US dollar. Like it or not, we live in the age of debt, and our financial system is now much more of a debt-based monetary system. And at the center of this system lies the US dollar and the US Treasury bond market.
Figure 2: U.S. Liabilities by Category, Year-end 2024
Source: Bureau of Economic Analysis
US Dollar
Since 1971, the US dollar has been the world’s primary reserve asset and medium of exchange for trade and currency transactions. No other currency comes close. The US dollar is persistently overvalued due to the world's structural and often involuntary need for dollars to facilitate global trade and finance and act as a reserve asset. This need is enabled and perpetuated by the US running persistent trade deficits. It’s difficult for the reserve currency issuer not to run a trade deficit and have a currency that tends to be structurally strong due to demand for its usage. This is the United States' conundrum as it attempts to weaken the dollar and bring back manufacturing to make exports more attractive. We need the dollar to remain the reserve currency and for foreigners to buy our debt.
US Treasury Collateral
The vast amount of debt worldwide also requires vast amounts of collateral. Think of collateral similar to a mortgage, where the value of the real estate backs the loan. In a commercial loan, the business owner often must post collateral such as inventory, accounts receivable, and personal guarantees. For the global debt market, the pristine collateral backing most of the global debt is US Treasury bonds. Once again, it’s up to the United States to provide liquidity to this system via US debt. Remember, by design, a fiat, debt-based monetary system must grow nominally; otherwise, it all falls apart. Most financial crises of the 21st century have involved a debt refinancing crisis. Examples include the GFC in 2008, which was associated with the US mortgage crisis, the Greek sovereign debt crisis in 2010, the UK government's “gilt crisis” in 2022, and the 2023 US regional banking crisis.
1984 vs. 2025
Government debt was a mere $1 trillion in 1984 compared to $36 trillion today. Our NIIP was $100 billion compared to -$26 trillion today. When President Reagan took office in 1981, he embraced the policies of the Volcker Federal Reserve to stem the rampant inflation of the 1970s through high interest rates and a strong dollar. Interest rates went into double digits, and the value of the US dollar skyrocketed. While this tamed inflation, it also triggered a debt crisis in Mexico and harmed US exports, similar to today's current situation. These pressures eventually led the administration to shift towards international policy coordination to lower the dollar's value, culminating in the Plaza Accord in September 1985.
The global economy would crumble if the same playbook, high interest rates, and strong US dollar were implemented in today’s economy. Because so much dollar-denominated debt exists inside and outside the United States, when interest rates rise and the value of the US dollar increases relative to other currencies, it causes havoc in the financial system.
The Path Forward
Nominal debt values are unlikely to drop globally for the foreseeable future, resulting in higher prices, increased monetary inflation, and continued fiat currency depreciation. This is a big reason the gold price has been relentlessly moving higher. The path forward for the US and global economies is uncertain. Perhaps the US dollar should play a slightly smaller role, with other currencies, such as the Chinese Yuan, participating in this burden. Or perhaps gold should be more prominent, imparting trust into the monetary system. I will continue to ponder these thoughts and write more in the future. However, we need more of what we experienced this past weekend: policy coordination, peace among rival nations, less fighting, more civil negotiation, better trade deals, etc. The global economy is at a critical junction, and the world needs to work together to solve these problems.
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