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If Only Foreigners Were Willing to Hold Even More Dollars Indefinitely

Here’s a wonky response to someone who is giving a talk tomorrow to an audience that is likely to worry about non-Americans holding, rather than spending, large amounts of U.S. dollars.


Thanks for writing.

You’re correct that, according to the conventions of international-economic accounting, each country’s current-account position is always exactly balanced by its capital- (or “financial”-) account position. More prosaically (if not technically precise), a country that runs a trade deficit during some period simultaneously runs during that period an identically sized capital-account surplus.

You’re correct also that holdings of dollars abroad are accounted as investments by foreigners in U.S. assets. Therefore, such dollar holdings do indeed cause the U.S. current-account deficit to be higher than it would be were these dollars instead spent on U.S. exports. But contrary to much popular and political anxiety, these dollar holdings – and any corresponding rise in the U.S. trade deficit – are no cause for concern.

Start with the fact that many protectionists would not be alarmed if foreigners accept from us an amount of real exports – such as software, pharmaceuticals, lumber, and machine tools – equal in value to the value of the imports we receive in exchange from foreigners. “There’s no trade deficit!” protectionists cheer, breathing sighs of relief.

But there’s nothing special about foreigners wanting the likes of American-made medicines and machine tools. Suppose that foreigners’ preferences change such that they come to regard U.S. dollars as consumption goods – say, foreigners come to want to wallpaper all of their homes and offices with Federal Reserve Notes. In this case, foreigners would be willing to continue to export to us steel, clothing, furniture, and whatever other real goods and services we demand from them in exchange for our little pieces of paper featuring monochrome portraits of dead Americans.

Although these purchases by foreigners of American dollars would still be accounted as foreign “investments” in America – and, thus, raise America’s trade deficit – why would it matter if the consumption goods that foreigners choose to buy from America consists overwhelmingly of rectangular pieces of green-ink-infused paper as opposed to something else? In all cases, we Americans should wish to pay as little as possible – that is, to export that which costs us as little as possible to produce – and to receive in exchange for these exports as many as possible imports.

Precisely because producing dollars involves very little in the way of real resource expenditures, the greater is the amount of dollars (relative to other things that we could produce and export) that foreigners wish to acquire, and to hold indefinitely, in exchange for the goods and services they sell to us, the better off we are.

In an ideal world for Americans, foreigners would give to us their exports for free. But it would be nearly as good if foreigners were willing to give to us their exports in exchange only for dollars that they never, ever intend to spend in America.

In short, tell your audience this: To worry about foreigners accumulating U.S. dollars never to be spent in America is to worry about foreigners shipping to us lots of valuable real goods and services in exchange for a product that costs us next to nothing to produce. It would be the equivalent of you or me being able to buy all that we desire of food, wine, clothing, automobiles, housing, jewelry, education, and Parisian vacations using only Post-It notes on which we hand-scribble the numbers “1,” “2,” “5,” “10,” “20,” “50,” and “100.”

Only if members of your audience believe that they and their families would be made worse off were they able to acquire valuable goods and services with such hand-scribbled Post-It notes should they worry about foreigners selling us stuff in exchange for dollars-to-hold.

Good luck with your talk!