Intro

President Trump's recent executive order establishing a U.S. Sovereign Wealth Fund has left many observers puzzled. Most analysts have dismissed it as either meaningless political theater or, more cynically, as a vehicle for personal enrichment. These interpretations fundamentally misunderstand both the purpose and significance of this initiative.

We believe the creation of a U.S. Sovereign Wealth Fund (SWF) represents a game-changing development in American economic policy. It provides clear confirmation of the strategy we outlined in our previous report, "The Dollar's Dilemma" - that the Trump Administration would move to address persistent trade imbalances by targeting capital flows and dollar overvaluation. The SWF represents a sophisticated tool for restructuring the global financial architecture that has long disadvantaged U.S. manufacturing.

In this report, we will demystify the executive order and demonstrate why it marks a pivotal shift in addressing global economic imbalances. By examining recent statements from key administration figures, particularly CEA Chair Stephen Miran and Treasury Secretary Scott Bessent, we show clear signs of how this tool will be deployed to force reciprocity in global capital markets and restore U.S. manufacturing competitiveness.

Balance of Payments

Most analysis focuses solely on the flow of goods and services between countries. However, this view captures only half the picture. International transactions are part of a larger system that includes two types of flows: trade flows (the exchange of goods and services) and capital flows (the exchange of financial assets like stocks, bonds, and property). These two flows are inextricably linked through what economists call the balance of payments, which can be expressed in a simple but powerful equation:

Trade Account* = Capital Account

*The technical BoP identity is: current account = capital account, but we are using “trade account” in place of the “capital account” for simplicity. It should be noted that the current account differs slightly from the trade account – a fact we can ignore for our discussion.

All US dollars, regardless of their global circulation, ultimately purchase either 1) US goods and services or 2) US financial assets. While some might argue that dollars can be used to buy commodities or assets from other countries, this merely transfers the dollars to new holders who face the same fundamental choices.

US dollars, irrespective of how they circulate globally, fundamentally represent claims on U.S. assets. When entities engage in international trade, whether for financial assets or physical goods like commodities, and receive dollars, they invest them in interest-bearing U.S. financial instruments, such as Treasuries. Even if these dollars are held in foreign banks or circulate within the Eurodollar market, they are reinvested into US assets, maintaining a continuous link to the U.S. financial system. The number of times these dollars change hands internationally is immaterial; they are invariably invested back into US assets, completing the circular flow.

This circular flow of dollars, always returning to purchase US goods and services, or US financial assets, is the fundamental reason why the balance of payments always balances. Every outflow of dollars is ultimately matched by an inflow, whether through the trade account or the capital account, ensuring that the balance of payments sums to zero.

The balance of payments accounting identity tells us that any change in one side of the equation must be matched by an equal and opposite change in the other. For example, when Korean pension funds invest $1 billion in U.S. stocks, all else equal, U.S. net exports must decrease by $1 billion and Korean net exports must increase by $1 billion, despite this transaction having no direct connection to trade in goods and services (see the FAQ section at the end of this report for a detailed explanation).

This framework helps explain why many conventional approaches to reducing the U.S. trade deficit have failed. When we focus solely on trade flows - through measures like tariffs or export promotion - we ignore the powerful role that capital flows play in driving trade outcomes. In fact, in today's global financial system, it's often capital flows that determine trade flows, rather than the other way around.

One of the fundamental misunderstandings about trade imbalances - particularly why China runs a persistent trade surplus while the US runs a persistent trade deficit - is the assumption that these imbalances are driven by one country’s inherent production cost advantage over the other. While production cost advantages do exist, they are not supposed to persist indefinitely in a properly functioning global trading system, because persistent imbalances should self-correct. When a trade surplus country experiences excess demand for its goods and services, this should cause either its currency to appreciate or its relative inflation rate to rise (changes in relative productivity can also occur but this is slower and less directly determined by trade and capital flows). An appreciating currency rebalances trade flows through two channels: it increases the production costs of the surplus country relative to its trading partners, while simultaneously raising real household disposable income. Since savings equals production minus consumption, this combination of higher relative production costs and increased household purchasing power naturally reduces the trade surplus.

However, this rebalancing mechanism has failed to operate effectively for the past 30 years due to a fundamental distortion in the demand for currencies.

There are two distinct drivers of currency demand:

1) Demand for goods and services (trade flows), which typically reflect the underlying dynamics of comparative advantage and trade balances.

2) Demand for financial assets (capital flows), which arises from the preference for holding or investing in a particular country’s financial instruments.

In today's financial system, it's the the desire for U.S. financial assets that has effectively short-circuited the natural currency adjustment mechanism. Despite decades of large trade deficits, which should have led to dollar depreciation, the U.S. dollar has remained strong because of overwhelming foreign demand for U.S. financial assets.

The overwhelming demand for U.S. financial assets reflects structural features of the global economy, particularly policies in surplus countries that generate and export excess savings. These policies systematically suppress household income and consumption, forcing domestic savings rates far above what's needed for domestic investment (in balance of payments: savings = production – consumption).

A crucial part of the equation is the fact that the United States has long been the only country that has sufficient liquidity and offers unrestricted access to its capital markets. While many nations carefully manage and sometimes restrict foreign investment to maintain control over their economies, the U.S. has embraced an open financial market regime.

We have been highlighting this structural imbalance for well over a decade. In our 2013 report, we published data demonstrating that the United States had become the world's primary destination for excess savings. As we wrote then,

The US runs a trade deficit because it has been forced to absorb nearly 100% of the world excess savings (i.e. net capital flows) due to the fact that the US is the only country that allows the free flow of capital and has a sufficiently large financial system to absorb the capital flows.

The United States needs the rest of the world to purchase more US goods and services and fewer US financial assets. But as long as the United States remains the only country willing, and able, to accept the world’s excess savings then it will continue to run a trade deficit regardless of trade policy.

The chart shows how capital flows from surplus countries, including China, Japan, oil producers, and other emerging Asian nations, are predominantly directed toward the United States, with few other significant destinations for these flows.

Little has changed in the proceeding decade. If anything, the United States' role as the primary destination for global excess savings has only become more entrenched. This persistent dynamic makes it clear that any meaningful rebalancing of global trade must address the capital side of the balance of payments. Traditional trade measures, like tariffs or export incentives, only tackle one half of the equation. The real leverage lies in capital flows. By regulating or even redirecting these flows, a country can influence its currency value and, in turn, its trade balance. To achieve lasting change, policies must incorporate capital flow measures alongside traditional trade measures, acknowledging that capital is not merely a passive response to trade imbalances, but a primary driver of them.

A User’s Guide to Restructuring the Global Trading System

Since we published 'The Dollar's Dilemma,' a significant development has reinforced our analysis: President Trump's appointment of Stephen Miran as Chair of his Council of Economic Advisors. Miran has been a leading proponent of addressing global imbalances through the lens of capital flows, having written extensively on how excess foreign savings distort U.S. financial markets and trade patterns. As one of the administration's most influential economic voices, his appointment signals a likely shift toward policies that directly confront these capital flow dynamics in the effort to rebalance the global trading system.

Prior to his appointment, Miran authored "A User's Guide to Restructuring the Global Trading System" at Hudson Bay Capital. This detailed blueprint reveals a framework strikingly aligned with our analysis over the years. Miran, like us, recognizes persistent dollar overvaluation driven by capital flows as one of the most significant drivers of global imbalances. "The root of the economic imbalances," he writes, "lies in persistent dollar overvaluation that prevents the balancing of international trade, and this overvaluation is driven by inelastic demand for reserve assets."

In his "User's Guide," Miran methodically catalogs the tools available to reshape the global trading system. His primary approach mirrors what we termed the "Mar-a-Lago Accord" scenario in "The Dollar's Dilemma" - a coordinated realignment of global currencies similar to the 1985 Plaza Accord.

Miran recognizes the challenges in securing such an agreement in today's environment. As he notes, neither Europe, facing sub-1% growth, nor China, doubling down on export-led growth amid domestic weakness, appears naturally inclined toward currency appreciation. This leads him to detail unilateral options that could create leverage for eventual multilateral negotiations.

Miran directly challenges the conventional wisdom about U.S. policy options:

Consensus on Wall Street is that there is no unilateral approach that the Trump Administration can take for strengthening undervalued currencies. These economists tend to point to the Federal Reserve's policy rate as the main driver of the dollar and then emphasize that the Fed will not cut rates merely because the President wants to achieve a currency outcome. This conclusion is wrong. There is a variety of steps an Administration can take if it is willing to be creative, that do not rely on the Fed cutting rates.

The first unilateral approach Miran proposes leverages the International Emergency Economic Powers Act (IEEPA). Signed into law by President Carter in 1977, IEEPA grants the President broad authority over international transactions in response to foreign-origin threats to U.S. national security, foreign policy, or economy. Miran suggests using these powers to directly address what he identifies as the root cause of dollar overvaluation: excessive foreign demand for U.S. reserve assets.

Specifically, Miran proposes using IEEPA to impose a "user fee" on foreign official holders of Treasury securities by withholding a portion of interest payments. This approach would make reserve accumulation less attractive while helping recoup some of the costs these holdings impose on the U.S. export sector. As Miran notes, while some bondholders might protest, most governments already tax interest income - the U.S. itself taxes domestic holders of Treasury securities.

This strategy aligns precisely with our prediction in "The Dollar's Dilemma" writing that

"If negotiations fail to produce meaningful adjustment, we expect the administration to move toward direct measures targeting capital inflows. There is clear historical precedent for such action - until 1984, the U.S. maintained a 30% withholding tax on foreign interest income. The elimination of this tax played a crucial role in enabling the explosion of global capital flows we've witnessed since”.

Return of the Foreign Withholding Tax: Killing Two Birds with One Stone

Secretary Bessent's first interview as Treasury Secretary may have provided an early signal of how the administration plans to implement this strategy. He emphasized the urgency of making the 2017 Tax Cuts and Jobs Act permanent, warning that "if we do not get this tax bill done...then we will have the largest tax hike in history." While this might seem unrelated to trade policy, it potentially creates the political opening for reimposing measures targeting capital inflows.

The challenge facing the administration is that making the Trump tax cuts permanent would cost an estimated $4 trillion over ten years, and many Republicans are unwilling to support this without offsetting revenue increases or spending cuts. Traditional tax increases face significant political hurdles. However, there is one solution that could address both the fiscal and trade objectives: reinstating the 30% foreign withholding tax on interest income.

The scale of potential revenue from such a measure is substantial. As of June 30, 2023, foreign portfolio holdings of U.S. securities totaled $26.9 trillion, with current estimates around $30 trillion, split roughly evenly between the foreign private sector and foreign official institutions. Conservative, back of the envelope estimates suggest a 30% withholding tax on interest income would generate approximately $360 billion annually in tax revenue, or $3.6 trillion over the ten-year window used by the Congressional Budget Office.

Crucially, this revenue would come entirely from foreign holders of U.S. securities, not domestic taxpayers. For private foreign investors, this wouldn't necessarily increase their total tax burden. For example, the average statutory top personal income tax rate in Europe is 42.8%. Therefore, European holders of US securities would simply pay 30% to the U.S. government and the remaining 12.8% to their home country. The lost revenue would be borne by foreign governments. Given that most foreign jurisdictions already impose similar withholding taxes on their securities, they would have limited grounds for retaliation. The U.S.'s large negative net international investment position further constrains potential retaliatory measures.

Private vs Official Flows: The Channel Changes, The Challenge Remains

The shift from official reserve accumulation to private capital flows as the primary driver of dollar demand represents a change in tactics rather than fundamentals. When U.S. returns are attractive (as with current higher rates), private capital flows from surplus countries into U.S. markets, and their central banks have no need to accumulate reserves. However, if private flows reverse, we typically see these central banks step in with reserve accumulation, a pattern that has repeated over decades. The specific channel through which surplus countries export their excess savings may change, but the economic impact remains the same: capital flows into U.S. financial markets rather than goods and services, maintaining dollar strength at levels that prevent trade rebalancing. This is why policy must address both private and official capital flows to be effective. Surplus countries will always find ways to maintain their trade advantages by preventing currency adjustment unless both channels are addressed.

The Sovereign Wealth Fund: A Capital Account Tool for Addressing the Trade Account

However, Miran's second unilateral option of reserve accumulation reveals the true purpose behind Trump's creation of a U.S. Sovereign Wealth Fund. "Another unilateral approach to strengthening foreign currencies," Miran writes, "is to mimic the approach taken by some of our trading partners and accumulate foreign exchange reserves. By taking dollars and selling them in the market for other nations' currencies, government can create additional demand for other currencies and increase their value."

In analyzing implementation paths, Miran states,

In terms of implementation, there are two meaningful avenues for doing so: the first is Treasury’s own assets, particularly its Exchange Stabilization Fund. The President can direct the Treasury Secretary to use the ESF as he sees fit. However, the ESF is of limited size: its total net position is less than $40 billion, of which $10 billion is already invested in foreign currency instruments.

Miran goes on to examine creative ways to expand this capacity, including leveraging the ESF or using Treasury's gold reserves through careful structuring of forward contracts to comply with statutory requirements.

“The Gold Reserve Act also authorizes the Secretary to sell gold in a way ‘the Secretary considers most advantageous to the public interest,’ providing additional potential funds for building foreign exchange reserves. However, the Secretary is statutorily required to use the proceeds from such sales “for the sole purpose of reducing the national debt.” This requirement can be reconciled with the goal of building foreign exchange reserves by having the ESF sell dollars forward. If gold sales are used to deliver dollars into the forward contracts, it will likely satisfy the statutory requirement of reducing national debt. There are other means of structuring the ESF transaction as a form of debt contract to comply with the law. While this is probably statutorily permissible, selling national gold reserves to buy foreign exchange instruments could be politically costly, and changes the asset composition of the USG’s balance sheet. Still, because gold pays no interest, selling it for positive-yielding foreign debt should result in income for the U.S. Government.”

When Treasury Secretary Bessent announced the SWF's creation, his language was striking:

"We're going to monetize the asset side of the U.S. balance sheet for the American people. There'll be a combination of liquid assets, assets that we have in this country as we work to bring them out for the American people."

It isn't hard to connect the dots between Bessent's announcement and Miran's framework. The fact that the administration's two most influential economic voices converge on using Treasury's assets for reserve accumulation is no coincidence. As Treasury Secretary and CEA Chair, Bessent and Miran will drive trade policy. The SWF clearly provides the institutional architecture needed to implement Miran's strategy and address trade imbalances through the capital account.

The SWF's intended role as a vehicle for purchasing foreign assets was underscored by President Trump's specific mention of acquiring TikTok. This was no random example. TikTok, as a foreign financial asset, represents exactly the type of acquisition that would serve the SWF's strategic purpose of accumulating foreign assets to address capital flow imbalances. Similarly, Trump's previously puzzling comments about purchasing Greenland can now be understood as an early signal of his administration's interest in acquiring foreign assets at scale to address capital flow imbalances.

The White House's own fact sheet on the SWF explicitly states that its purpose is to pursue "President Trump's economic policies - including the pursuit of fair and balanced trade." This direct connection to trade policy alignment strongly suggests the SWF is indeed meant to serve as a tool for addressing trade imbalances through capital flows, as outlined in Miran's framework.

At this point, we have limited information about the specific structure and implementation of the SWF. However, on the day of the announcement of the SWF executive order (2/4/25), Bloomberg reported that one approach under consideration involves converting the U.S. International Development Finance Corp (DFC) into a sovereign wealth fund. A separate Bloomberg report on February 13th, 2025, states that the administration is discussing plans to shift billions in funding from USAID to the U.S. International Development Finance Corp (DFC), transforming it into a more aggressive instrument of U.S. economic power. The plan would reduce humanitarian assistance in favor of strategic project finance initiatives and investments in critical minerals and resource projects, with an expanded role for private equity groups and investors. This restructuring aligns perfectly with the reserve accumulation strategy Miran proposed, as it would create a vehicle capable of making significant foreign investments at scale.

Potential Scale of the SWF is Significant

Banks do not simply lend out existing deposits, they create new money through the lending process, expanding the total money supply in the economy. As a financial institution, the DFC could operate with bank-like leverage ratios. Commercial banks typically maintain leverage ratios of 10-20x their equity capital, meaning each dollar of capital supports $10-20 in assets. With Treasury's gold reserves valued at $841 billion at current prices ($2,850/oz), using this gold to capitalize the DFC could create $8.4-16.8 trillion in lending and reserve buying power.

It’s worth noting that there has been much discussion about the Treasury revaluing its gold reserves, which are officially carried on its books at the outdated 1970s-era rate of $42.22 per ounce. However, a revaluation would not be necessary for the DFC strategy. Banks are required to mark their gold holdings to market daily when measuring their capital ratios. Therefore, simply capitalizing the DFC with Treasury’s gold would allow capital ratios to be calculated based on gold’s current market price, not its historical book value. Technically, gold wouldn’t need to be “revalued” on Treasury’s books, the DFC’s capital adequacy would automatically be determined by gold’s current market price.​​​​​​​​​​​​​​​​

Our calculation considers only Treasury’s gold reserves but gold is only one of a number of assets that could be “monetized”. The U.S. government possesses numerous other assets, from land and mineral rights to infrastructure and strategic stockpiles, that could potentially be used to capitalize the SWF. While a more conservative leverage ratio might be employed, the inclusion of these additional assets could still support massive reserve accumulation capacity. We highlight the gold-based calculation to illustrate the potential scale possible under standard bank leverage ratios, as we believe the Trump administration will aim for significant firepower in pursuing its reserve accumulation strategy.

This structure is an elegant solution to the constraints Miran identified with the ESF approach. Rather than selling gold outright, the Treasury could use it as capital backing for the DFC's operations. This would allow for reserve accumulation at meaningful scale while preserving the nation's gold stock. While this expansion of the money supply would likely require some Fed sterilization (a topic that deserves its own analysis) it provides a more powerful tool for implementing Miran's strategy than existing mechanisms.

Unprecedented Gold Market Activity: Preparation for SWF Capitalization?

Recent developments in physical gold markets have raised intriguing questions about potential preparation for such a strategy. An unprecedented accumulation of physical gold is currently taking place in COMEX vaults. January 2025 alone saw over 19,000 contracts delivered, a scale of physical delivery never before witnessed in the market's history. COMEX data shows combined vault holdings have surged to approximately 35.5 million troy ounces, while London vault inventories are being simultaneously depleted, with withdrawal times extending to eight weeks. Perhaps most notably, the U.S. has switched from being a net gold exporter to a net gold importer during this period.

While we cannot definitively identify the entity behind these massive gold purchases, the timing and scale of this accumulation are curious, to say the least, given the context we've laid out in this report. One plausible scenario is that the Treasury is quietly building its gold holdings to enable larger capitalization of the DFC/SWF. This would be legally permissible, under 31 USC 5116, as the Secretary of the Treasury has authority to "buy and sell gold in the way, in amounts, at rates, and on conditions the Secretary considers most advantageous to the public interest" with Presidential approval. While the Treasury hasn't purchased gold since announcing its withdrawal from the private market in March 1968, the legal framework for resuming purchases remains in place.

Fed FX Reserve Accumulation

Miran’s second avenue to implement reserve accumulation is for the Fed to purchase foreign exchange reserves:

“The other means of building a reserve portfolio is to use the Federal Reserve’s System Open Market Account, since the Federal Open Market Committee authorizes the New York Fed to do so. Use of SOMA requires cooperation from the Fed—which, to repeat, is not impossible given the Fed defers to Treasury on currency policy, and can be the outcome of any number of agreements between the Fed and Treasury, but must be voluntary to preserve the Fed’s inflation fighting credibility. Given the Fed’s ability to create money supply at will and operate with any capital position, size constraints do not arise from purchasing power, but rather from available assets to purchase…a reserve fund can buy assets, like longer-term foreign government debt, or other assets”

As Miran notes, a plan for the Fed to purchase FX reserves would require cooperation by the Fed. However, Fed Chairman Powell may be resistant to cooperate with the Trump Administration’s plan. Therefore, the Administration might initially choose to go the route of the Treasury funded SWF due to Treasury Secretary Bessent’s willing participation.

Mechanics Behind Traditional and US Sovereign Wealth Funds

To understand how the U.S. SWF differs from traditional sovereign wealth funds, it's worth examining the typical mechanics of foreign reserve accumulation. When domestic companies in surplus countries earn foreign currency through trade, central banks often accumulate these trade-earned dollars, effectively recycling them back into U.S. financial markets as reserves. Similarly, traditional sovereign wealth funds, typically found in commodity-exporting nations, take trade-earned dollars from state entities and reinvest them in foreign assets.

The U.S. SWF operates through a different mechanism: instead of recycling trade-earned dollars, it would create new dollar reserves to purchase foreign assets. However, from a balance of payments perspective, the economic impact is identical to traditional reserve accumulation or sovereign wealth funds. Whether through a central bank converting trade-earned dollars into reserves, a commodity-based SWF reinvesting oil revenues, or the U.S. creating new dollars to purchase foreign assets, all these activities represent capital outflows that must be matched by corresponding trade flows.

Strategic Logic of Reserve Accumulation

To understand how a U.S. SWF could effectively counter surplus countries' strategies, we need to understand the logic of reserve accumulation. When surplus countries build FX reserves, they're ensuring they remain net exporters of capital, which through the balance of payments means they must be net exporters of goods and services.

Japan provides a perfect example of how this game works. When foreign capital flows into Japan, they immediately push it back out by buying foreign assets, at whatever scale necessary to remain net capital exporters (and thus net trade exporters). This strategy works because surplus countries deliberately target their reserve accumulation toward markets like the U.S. that don’t respond in kind and allow unrestricted capital inflows. In fact, this is precisely why the U.S. has become the world's primary source of reserve assets. We are unique among major economies in allowing foreign capital to flow freely into our markets without reciprocal access or countervailing measures.

While other countries actively resist and redirect unwanted capital inflows, the U.S. has passively absorbed the world's excess savings, effectively subsidizing the export-led growth strategies of surplus countries. This asymmetry isn't a natural market outcome but rather reflects policy choices, both by surplus countries to restrict capital inflows and by the U.S. to accept them without restriction.

As Miran aptly notes, "it's not even clear what we could buy at scale given capital controls around the Chinese economy." This observation gets to the heart of the asymmetry in global capital markets. While surplus countries enjoy unrestricted access to U.S. financial markets, they maintain extensive controls that limit foreign ownership of their domestic assets. This asymmetry is not accidental, these countries understand that unrestricted capital flows would force domestic adjustments that would erode their trade surpluses.

Critics often miss how these capital flows force domestic economic adjustments. Just as foreign capital inflows have shaped U.S. economic conditions by inflating asset prices and suppressing savings, U.S. capital outflows through the SWF would reshape conditions in recipient economies. Their domestic variables must adjust to accommodate these flows, regardless of local policy preferences.

If surplus countries resist U.S. capital flows while continuing to freely invest in U.S. markets, they expose the mercantilist nature of their policies. This creates clear justification for implementing reciprocal restrictions through mechanisms like the International Emergency Economic Powers Act (IEEPA). Politically, restricting foreign access to U.S. financial markets becomes far more feasible after countries have demonstrated unwillingness to accept reciprocal capital flows. By forcing surplus countries to either accept reciprocal flows or lose privileged access to U.S. markets, the SWF creates leverage for restructuring the global financial architecture that has long advantaged surplus countries at U.S. expense.

The SWF provides the administration with powerful leverage in pursuing a multilateral agreement for currency realignment - what we've called a potential "Mar-a-Lago Accord." By demonstrating both the capability and willingness to accumulate foreign reserves at scale, the U.S. gains crucial negotiating leverage with surplus countries. The prospect of U.S. intervention through the SWF, and especially IEEPA capital controls, makes a negotiated solution more attractive to surplus countries than facing unilateral action. This gives the Administration a credible tool to bring partners to the table for discussions on orderly dollar devaluation and broader reforms to the global financial architecture.

Conclusion

The seemingly chaotic opening days of Trump’s second term mask a sophisticated strategy to restructure the global trading system. While markets focus on the threat of tariffs, the administration is quietly assembling an array of unilateral options, ranging from traditional trade measures to more powerful capital flow tools. The creation of the Sovereign Wealth Fund, alongside potential IEEPA restrictions and tariffs, demonstrates the administration is prepared to act independently, but crucially hopes it won’t have to.

This follows Trump's characteristic negotiating approach: develop credible unilateral options to create leverage for a multilateral solution. The ultimate goal appears to be a "Mar-a-Lago Accord" that would engineer a coordinated dollar devaluation and establish new rules preventing persistent trade surpluses, echoing Keynes's original vision at Bretton Woods. The administration's preparation of multiple unilateral tools, including both tariffs and capital flow measures, serves primarily to bring key players to the negotiating table.

As Treasury Secretary Bessent emphasized, "tariffs are a means to an end." If negotiations succeed, neither tariffs nor capital flow restrictions would be necessary. A coordinated restructuring of the global trading system would benefit not just the U.S. but all deficit countries, including Mexico with its seventh-largest trade deficit globally. The administration's tough posturing across multiple fronts should be understood not as policy preference but as creating leverage for meaningful reform.

While trade surpluses and deficits are not inherently problematic, the persistent global imbalances that have defined the economic landscape for decades are neither natural nor healthy. These chronic imbalances do not reflect comparative advantage or market forces, but rather systematic distortions in how income and demand are distributed within surplus economies. When countries implement policies that suppress domestic consumption and generate excess savings that must be exported, they force corresponding deficits on their trading partners.

The current global trading paradigm has created clear winners and losers. Manufacturing sectors in persistent surplus countries have thrived by maintaining artificially weak currencies and suppressing domestic consumption. In the U.S., these policies have channeled massive capital flows into financial markets, disproportionately benefiting Wall Street and asset owners while hollowing out the manufacturing sector. Given how deeply entrenched these patterns have become, any significant restructuring risks major market disruption, as many investors are poorly positioned for such a dramatic reversal in capital flows. Many skeptics doubt the Trump administration's willingness to challenge Wall Street's interests, but Treasury Secretary Bessent's own words suggest otherwise: "Wall Street has had it great. And now under this Administration its Main Street's turn."

As the administration assembles an array of economic tools, including tariffs, capital controls, and the newly formed SWF, it becomes clear that these moves are not isolated policies but part of a larger strategy to reshape global economic relations. Treasury Secretary Scott Bessent hinted at this in June when he positioned himself for the role, stating:

‘We’re also at a unique moment geopolitically, and I could see in the next few years that we are going to have to have some kind of a grand global economic reordering, something on the equivalent of a new Bretton Woods or if you want to go back like something back to the Steel Agreements […] or the Treaty of Versailles, there’s a very good chance that we are going to have to have that over the next four years, and I’d like to be a part of it.’

Treasury Secretary Bessent has not only acknowledged that a global economic restructuring is likely but has actively positioned himself to help shape it. This is not speculation from an outsider; it is the perspective of one of the most influential policymakers at the center of U.S. economic strategy. His appointment as Treasury Secretary signals that this administration is not only aware of the need for structural change but is intent on pursuing it.

The potential Mar-a-Lago Accord represents more than a mere trade negotiation; it could represent a fundamental restructuring of the global economic order on par with Bretton Woods. Just as the 1944 conference created a new international monetary system that shaped global economic relations for decades, this accord aims to address the structural imbalances that have distorted global trade for generations. Where the Plaza Accord was a temporary adjustment, the Mar-a-Lago approach should seek a more fundamental restructuring, creating a framework that realigns economic incentives, rebalances global demand, and ensures a more equitable distribution of economic opportunity across both surplus and deficit economies.

Addressing Frequently Asked Questions and Concerns

Hasn't China been a driver of global growth?

When asking if China has been a driver of global growth, we need to carefully distinguish between global growth and rest-of-world growth.

Yes, China’s rapid GDP growth has significantly boosted global GDP growth figures since China is part of the global economy. However, what matters for rest-of-world growth is not China’s overall GDP growth, but rather the difference between Chinese production and Chinese domestic demand (consumption + investment).

In China’s case, production growth has consistently outpaced domestic demand growth. This means Chinese production has not only met all of China’s increased domestic demand, but has captured additional demand from the rest of the world. When a country’s production exceeds its domestic demand by this much, you’re actually taking more demand from other countries than you’re providing through your own consumption growth.

So while China has certainly driven up global GDP numbers through its own growth, it has actually been a net drain on rest-of-world demand, not a source of it. The fact that Chinese production satisfies more than 100% of Chinese domestic demand means they’re effectively absorbing demand from other countries rather than creating it.

There’s a common assumption that countries running trade surpluses must have superior productive capabilities or are simply ‘better at competing’ than other nations. But is this really what a trade surplus tells us about an economy?

This is a common mistake, equating trade surpluses with superior production capabilities, higher productivity, economic strength, and being “better at competing”. But a trade balance simply tells you the gap between what a country produces and domestic demand (consumption + investment). This gap can be driven by factors entirely unrelated to productive capacity:

1. External forces beyond a country’s control, like foreign entities buying your financial assets for reserves, keeping your currency strong and affecting trade flows

2. Domestic policy choices, like when countries implicitly tax consumption and subsidize production, which increases production relative to consumption — like China does.

Moreover, producers are also consumers, so increased productivity should flow back into higher incomes and thus higher consumption. People often mistakenly link trade surpluses to low wages, but high-wage countries like Germany run persistent surpluses too. What matters is wage repression — wages relative to productivity. Both China and Germany maintain surpluses by keeping wages low relative to worker productivity, meaning workers don’t receive the full value of their increased output.

If you want to measure a country’s actual productive capabilities or economic strength, metrics like GDP per capita or total GDP are far more meaningful indicators than the trade balance, which merely reflects the relationship between domestic production and demand.

Won't Reduced Foreign Buying Drive Up U.S. Interest Rates?

Foreign capital flows into U.S. markets do not automatically reduce interest rates, despite common assumptions. Understanding why requires examining how these inflows affect the broader economy.

When foreign capital flows into the U.S., the economy must adjust in one of two ways: rising unemployment or rising debt. In the first scenario, as capital inflows force a higher trade deficit, domestic producers lose demand to foreign competitors and lay off workers. These unemployed workers draw down savings, so foreign savings effectively replace domestic savings rather than adding to the total pool. This means no net increase in demand for U.S. bonds and thus no downward pressure on interest rates.

The second adjustment path involves rising debt to prevent unemployment. The government might expand its fiscal deficit, or monetary policy might encourage household borrowing to maintain spending levels. Foreign purchase of US debt is matched by additional debt issued by Americans. If you consume 100 widgets and you only produce 80, you have to finance 20 widgets by selling financial assets (debt these days). With both supply and demand rising together, there's no clear effect on interest rates.

Another helpful way to see why foreign bond purchases do not necessarily lower U.S. interest rates is to look at the broader pattern across countries. In theory, if foreign demand for a nation’s bonds reduces its rates, then countries running larger trade deficits (i.e., benefiting from more foreign bond-buying) should have systematically lower rates. Yet, the opposite often holds for those borrowing in their own currency. Major surplus economies, such as the Eurozone, Japan, and China, do not have higher interest rates than the United States, despite sending out more capital and receiving less “benefit” from foreign bond-buying. Furthermore, when the Eurozone shifted from balanced trade to a sizable surplus, its interest rates actually declined rather than rose. This pattern undercuts the idea that foreign purchases of U.S. bonds must drive U.S. rates downward.

Moreover, the conventional fear that reduced foreign buying would drive Treasury yields significantly higher fundamentally misunderstands what determines bond yields. Treasury yields primarily reflect market expectations of future Federal Reserve policy rates, not foreign demand dynamics.

Ultimately, foreign capital inflows can either raise or lower interest rates, depending on a range of economic factors. In most cases, however, countries that export capital (i.e., run persistent trade surpluses) see their income grow faster than their debt-servicing costs, which steadily increases their capacity to manage debt. Of course, surplus economies can still misallocate capital (as seen in China), pushing debt-to-GDP higher. That said, if the United States truly wants to reduce its debt-to-GDP ratio in the long run, it needs to reverse its persistent balance of payments imbalance.

How does a SWF help create manufacturing jobs in the US?

The SWF creates manufacturing jobs through its effects on capital flows and exchange rates. When foreign capital flows into U.S. financial markets instead of purchasing American goods, it keeps the dollar artificially strong. This overvalued dollar makes U.S. exports too expensive in global markets while making imports artificially cheap, directly undermining American manufacturing competitiveness.

Exporting capital is equivalent to importing demand. Just as surplus countries have "stolen" U.S. demand by exporting capital to us, the SWF would reverse this dynamic. By using the SWF to accumulate foreign assets, the U.S. creates outward capital flows that must be balanced by changes in trade flows. These outward flows reduce upward pressure on the dollar, allowing it to move toward a more competitive level. A weaker dollar makes U.S. manufactured goods more competitive both domestically and in export markets.

Isn’t foreign investment good for the US?

Foreign investment in the U.S. would be beneficial if our economy were constrained by lack of capital. However, this fundamentally misunderstands today’s economic reality.

In the 19th century, foreign capital helped fund American industrialization because the U.S. lacked sufficient domestic savings to finance railroads and factories. Today, the constraint on investment isn’t lack of capital, it’s lack of profitable opportunities given current levels of demand.

Even foreign direct investment (FDI), which many view as inherently beneficial, can contribute to this demand problem. While people often point to individual cases where foreign companies create jobs through U.S. investments, this misses the broader economic impact. These same investments could be funded domestically — U.S. banks can expand credit, or foreign companies could raise capital from U.S. investors who would gladly fund projects with attractive returns. The U.S. has deep, sophisticated capital markets and ample domestic savings capacity.

The key point is that the U.S. doesn’t lack funding sources for profitable investments. When foreign capital flows in, whether through FDI or portfolio investment in existing financial assets, it typically displaces domestic funding rather than enabling investment that wouldn’t otherwise occur. And because these capital inflows must be matched by trade deficits through the balance of payments mechanism, they reduce aggregate demand in the economy, which further reduces the incentive for domestic investment.

This is why economists like Michael Pettis emphasize that for advanced economies like the U.S., excessive foreign capital inflows are harmful rather than helpful. They don’t solve an investment funding problem, they create a demand problem.

Foreign central banks are no longer accumulating reserves. US dollar demand is now primarily driven by private investors rather than central bank reserve accumulation. If private capital flows are the dominant driver of U.S. inflows, does that weaken the case for policies aimed at reducing reserve accumulation? Is the U.S. being the “most attractive investment destination” really a problem?

The shift from central bank reserve accumulation to private capital flows, while notable, doesn't fundamentally alter the underlying economic dynamics of global imbalances. The core issue isn't the specific channel through which foreign capital enters U.S. markets, but rather the persistent structural imbalances that drive these flows.

Surplus countries continue to produce more than they consume and invest domestically, generating excess savings that must find an outlet. Whether these savings flow into U.S. markets through private investors (as we see today) or official reserves (as in 2002-2014), the economic effect remains the same: excess foreign savings flowing into U.S. financial assets rather than goods and services, maintaining dollar strength at levels that prevent trade rebalancing.

The distinction between "market-driven" private flows and "policy-driven" reserve accumulation is somewhat artificial. Both channels stem from policy choices in surplus countries that suppress domestic consumption and generate excess savings. When private flows go to persistent trade surplus countries like China, Korea, and Japan, their central banks build FX reserves by reexporting that private capital to maintain their trade surpluses. When U.S. returns are attractive (as with current higher rates), private capital flows out those countries and into the US and their Central Banks have no need to acquire reserves. However, if private flows reverse, we will see a return to reserve accumulation by these Central Banks, a pattern we've observed repeatedly.

Importantly, these capital flows don't primarily fund productive investment in the U.S. Instead, they force domestic adjustments through some combination of higher unemployment, rising household or government debt, and asset bubbles.

Ultimately, the balance of payments ensures that these capital inflows must be matched by U.S. trade deficits, regardless of whether they come through private or public channels. While the mechanism of capital flows may have shifted, the fundamental challenge remains: surplus countries are exporting their domestic imbalances to the U.S., leading to economic adjustments that can undermine manufacturing and increase financial instability.

How do we know the direction of causality of US trade deficits?

The balance of payments presumes no direction of causality. A trade deficit and its corresponding capital account surplus can be the result of higher US demand for foreign imports than foreigners have for US exports, or it can be the result of higher foreign demand for US financial assets than American demand for foreign financial assets.

However, changes in currency value tell us the direction of causality.

Starting in equilibrium where foreign demand for US goods and services equals US demand for foreign financial assets (black lines in the chart below).

If Chinese demand for US financial assets rises, the Chinese need to finance that by selling more of their stuff and thus offering it at a lower yuan price per dollar. In this case US dollar increases relative to the yuan. Shown in scenario A.

But if Americans now demand more Chinese goods & services, they must offer more US dollars per Chinese Yuan. The dollar depreciates relative to the Yuan. Shown in scenario B.

The current (ie trade account) and capital accounts shift by the same amount in both cases, but the exchange rate moves in opposite directions.

The US trade deficits (i.e. current account deficits) have occurred alongside an appreciating currency. This tells us the cause of the US trade deficits has been excessive foreign demand for US financial assets and not the other way around.

This conclusion is further reinforced by examining asset market performance. If the U.S. were truly dependent on attracting foreign capital to fund excessive spending, we would see two clear signs:

1. U.S. financial assets would underperform as we competed for scarce foreign capital

2. The dollar would weaken as our need for external funding grew

Instead, we see the opposite. U.S. financial assets have been among the world’s best performing, and the dollar has remained exceptionally strong despite decades of trade deficits. This pattern is precisely what we’d expect when foreign demand for U.S. financial assets drives trade deficits, not the other way around.

History provides clear examples of countries that genuinely needed to attract foreign capital to fund trade deficits. They invariably faced weak currencies and poor asset returns, having to offer substantial yield premiums to entice foreign investors. The U.S. experience could not be more different.​​​​​​​​​​​​​​​​

The U.S. should focus on fiscal discipline, and reducing the fiscal deficit, which reduces national savings and contribute to the trade deficit.

It is a common misconception that US fiscal deficits drive capital flows and trade deficits; however, the causality runs the other way, as foreign capital inflows force domestic adjustments, including fiscal deficits. When foreigners use trade earned dollars to buy US financial assets instead of goods and services, the US must adjust either through higher unemployment, larger fiscal deficits, or increased private sector debt.

The "twin deficits" view misses that fiscal deficits are often a symptom of absorbing excess foreign savings, not the cause. Persistent surplus countries need to address their policies that generate excess savings and prevent natural rebalancing. US fiscal "discipline" won't fix this when surplus countries need to export their savings somewhere. History shows fiscal tightening often just shifts adjustment to private sector debt or unemployment.

The tell that fiscal deficits don't drive these flows is the dollar’s strength despite massive deficits. When countries truly need foreign capital to fund deficits, their currencies weaken, and its financial asset prices fall. Anyone who's studied financial history knows what it looks like when a country needs “pull” foreign capital to fund deficits: currency collapse, soaring risk premiums, capital flight, plunging asset prices. This was Latin America in the 80s, Asia in the 90s, and the European periphery in 2011.

The US experience is exactly opposite: U.S. financial assets have been among the world's highest valued and best performing, and the dollar has remained exceptionally strong despite decades of trade deficits. This pattern only makes sense if foreign demand for US assets is driving flows, not US borrowing needs. US asset prices tell us which way causality runs.

Don’t you need to run a trade surplus to have a SWF or accumulate FX reserves?

No. This fundamentally misunderstands the causality. Reserve accumulation actually creates trade surpluses, not the other way around. The Asian Tigers in the 1990s provide a perfect illustration of this principle: these countries weren't in strong financial positions when they began accumulating foreign exchange reserves. Instead, they created domestic currency to purchase foreign assets, and this policy of reserve accumulation was precisely what generated their trade surpluses.

The mechanism is straightforward: When a central bank or sovereign wealth fund creates currency to purchase foreign assets, this represents a capital account deficit that must be matched by a current account surplus. The balance of payments ensures this adjustment must occur. This is how countries like South Korea, Taiwan, and later China built their manufacturing bases - by using reserve accumulation to prevent currency appreciation and maintain export competitiveness.

The U.S. SWF would operate through the same mechanism. By creating dollars to purchase foreign assets, it generates outward capital flows that necessarily result in improved U.S. trade balances. The resulting economic adjustments, whether through exchange rates or other channels, must produce corresponding changes in trade flows.

You write “Therefore, when foreigners use their dollars to buy more US stocks or bonds, it automatically reduces US net exports of goods and services”. Without a currency adjustment, what’s the “automatic” mechanism that reduces US net exports?

Consider a simple two-country world (U.S. and China) where initially no one owns foreign currency.

Chinese entities can acquire U.S. dollars in two ways:

1) Trade Chinese financial assets for U.S. dollars (a pure financial transaction that nets out in the balance of payments)

2) Trade Chinese goods and services for U.S. dollars

When Chinese entities receive dollars from selling goods and services to the U.S., these dollars must return to the U.S. in one of two ways: 1) Buy U.S. goods and services (which would balance trade flows) 2) Buy U.S. financial assets

If they use these trade-earned dollars to buy U.S. financial assets instead of U.S. goods and services, this creates an imbalance: China has exported goods without importing an equivalent amount, creating a trade surplus matched by a capital account deficit (accumulation of U.S. financial assets).

The "automatic" reduction in U.S. net exports occurs because dollars earned from trade but used to buy financial assets are, by definition, not being used to purchase U.S. goods and services.

Do rising asset prices increase a nation’s wealth?

Rising asset prices do not inherently increase national wealth. True wealth creation occurs only when an economy enhances its capacity to produce goods and services that improve living standards. Rising asset prices that aren't tied to increased productive capacity merely represent a transfer of wealth between groups rather than net new wealth for the economy.

This distinction between real wealth and nominal gains is crucial. Real wealth comes from productivity improvements, technological innovation, and enhanced infrastructure that sustainably increase income and living standards. In contrast, nominal gains from asset price inflation, whether in stocks, real estate, or other financial assets, often represent speculative value that doesn't expand the economy's productive capabilities.

When asset prices rise without corresponding productivity growth, the gains for sellers come at the expense of buyers. A housing bubble, for instance, enriches current owners but transfers wealth from future buyers who take on greater debt without any improvement in housing quality or infrastructure. Similarly, stock market surges driven by speculation rather than genuine corporate innovation or earnings growth simply redistribute wealth from late investors to early sellers.

The problem becomes even more acute when foreign investors own domestic assets. In such cases, rising asset prices can actually transfer wealth abroad when profits are repatriated, draining purchasing power from the local economy. Furthermore, while borrowing against inflated assets might temporarily boost spending, this creates financial fragility if incomes don't rise due to stagnant productivity.

Asset prices can signal genuine wealth creation, but only when they reflect real economic improvements - like technological breakthroughs that lower production costs, infrastructure development that enhances trade capacity, or sustainable increases in corporate profits driven by better products and services. Without these fundamental improvements in productive capacity, rising asset prices simply mask wealth transfers rather than create new wealth.

A Special Note:

This analysis owes a profound intellectual debt to Michael Pettis. The thread connecting the three most influential trade policy architects in the Trump administration - JD Vance, Scott Bessent, and Stephen Miran - is their deep intellectual grounding in Pettis' work on global economic imbalances. For those who have followed Pettis closely, his intellectual fingerprints are unmistakable: the emphasis on savings, consumption dynamics, and the structural nature of trade imbalances resonates clearly in their rhetoric. Each of these policymakers speaks with a distinctive cadence that reflects their shared intellectual lineage, a testament to Pettis's profound insights into the global economic system that have shaped a new generation of economic thinkers.