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Yves here. Please welcome Xiaoping Gu (顾晓平), who sent us a short, layperson-friendly article that summarizes some of his academic work, specifically as The systematic extraction of global resources under the U.S. trade deficit model, published in the Real-World Economics Review, Issue 113. Xiaoping points out that the US case is out of line with what standard trade models predict: that sustained trade deficits will trigger a balance of payments crisis. Xiaoping contends that the reason that has not happened is that the US is effectively a global central bank. The result, as Xiaoping explains, is that “Contrary to the mainstream view, the US trade deficit is not a liability; it represents an asset and income for the United States. ”
This model does have explanatory power. although one wonder what happens next with the US’ aggressive use of dollar sanction undermining its world central banker role.
By Xiaoping Gu, PhD. in Economics. Originally published at Real-World Economics Review
For a long time, the global mainstream economics community has faced a massive theoretical embarrassment: Why has the United States been able to run massive trade deficits year after year without triggering a fatal balance-of-payments crisis, while instead experiencing long-term asset price prosperity and a continuous expansion of national wealth?
According to conventional textbook “common sense,” a trade deficit implies insufficient domestic saving and overconsumption, which over time should logically lead to a debt crisis and economic recession. However, the reality of the US economy has charted a completely paradoxical trajectory.
To untangle this puzzle, we must break free from traditional frameworks and confront a fundamental institutional reality: The United States is not just an ordinary trading nation; it is the global central bank.
The primary responsibility of a traditional central bank is to issue currency for a single sovereign nation. Through open market operations or discount windows, the Federal Reserve issues US dollars domestically, making it merely the central bank of the United States. In contrast, the entire US economy issues dollars to the rest of the world through massive trade deficits, making it the global central bank. A sovereign central bank enjoys a 100% “seigniorage” during the issuance process: however much currency it issues, an equivalent amount of assets is created out of thin air on its balance sheet—truly a process of turning nothing into gold. Meanwhile, the quality goods that the US economy net-imports from the global market serve as the newly acquired assets continuously accumulated through this process.
Even more striking is its “re-entry mechanism.” While a national central bank typically cancels currency when it is withdrawn from circulation—causing the prior seigniorage to vanish—the US economy wields a far more dominant power than any ordinary central bank: the massive flow of dollars sent abroad is “re-entered without being cancelled” through the U.S. capital markets. The repatriated funds ultimately transform into reserve funds for US listed corporations or fiscal funds for the US government, entering an entirely different web of creditor-debtor relations. They never return to the US real economy to demand redemption, meaning the seigniorage previously collected by the US economy becomes permanently fixed and never disappears.
To be fair, a national central bank is assigned a non-profit attribute, meaning even a 1% return generated by asset fluctuations must be remitted as “seigniorage” to the nation’s treasury department. Yet, no one can “order” the US economy to be non-profit, nor is there a “world treasury department” to receive the seigniorage proceeds of the US economy. Consequently, a counter-intuitive fact emerges: this 100% seigniorage must remain retained within the US economy, transforming into its pure income.
As the sole issuing hub of world currency, this unique mechanism endows the US economic entity with an unparalleled structural privilege—the “Dollar Dividend.” Under the non-US model, a trade deficit implies the accumulation of external liabilities and a heavy burden of future repayment. Under the US model, however, due to the world’s absolute rigid demand for the US dollar, the outflow of dollars is essentially an injection of currency and liquidity into the global economy, traded in exchange for tangible, high-quality global resources.
This implies that through the global dollar cycle, the nature of the trade deficit is fundamentally distorted: on the balance sheets of non-US nations, it appears as a liability; but on the US balance sheet, it should be categorized as an asset, just like all sovereign central banks.
To further clarify the operational mechanism of this global wealth alchemy, consider a minimalist thought experiment:
Assume the global economy consists solely of the United States and the Rest of the World (RoW). Initially, the U.S. possesses physical assets K and currency K, while the RoW possesses surplus physical resources K.
- Step 1: The Federal Reserve issues an additional amount of dollars with a nominal value of K. If confined domestically, the purchasing power of these dollars would simply be halved, rendering the over-issued currency a mere nominal symbol. However, as the global reserve currency, it flows abroad to purchase physical resources K from the RoW—thus creating a trade deficit. The U.S. now possesses 2K in physical resources, while the RoW holds dollars K.
- Step 2: Seeking returns, the RoW uses its K dollars to purchase U.S. equities or government bonds. The U.S. issues equity and debt claims in exchange for an equivalent capital inflow.
- Outcome: The RoW has traded physical commodities for equity or debt claims on U.S. assets. Meanwhile, while total financial assets remain unchanged, the physical resources located within the U.S. have doubled, increasing from K to 2K.
This involves no financial trickery or systemic deception; it is the natural and inevitable consequence when the world chooses a nation’s currency as its global reserve currency.
This represents the ultimate energy-level dividend (seigniorage dividend) in modern economics: every individual transaction at the micro level is conducted as an independent, legitimate exchange; yet at the macro level, the system silently doubles its physical assets by trading credit for physical commodities.
Of course, the U.S. does not issue dollars equivalent to its entire physical resource K all at once. What actually happens is that the dollars issued to the world via trade deficits amount to roughly 3% of U.S. GDP annually; yet over 40-plus years, the scale and cumulative effect precisely mirror the thought experiment above.
Precisely because mainstream economics refuses to acknowledge that “the US trade deficit is income”—a counter-intuitive economic reality—let alone understand the unique nature of the US economic model, it remains entirely helpless in the face of contemporary global economic imbalances. The forces of capital and markets have always evolved according to their own authentic logic. What we need to do is shatter the myths of dogma and bravely confront the true operational mechanismof the world currency issuer.
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