New York – In a recent article, economist Stephen Miran, soon to head President Donald Trump’s Council of Economic Advisers, proposes an unconventional explanation for the US’s chronic trade deficit. According to Miran, the primary driver is foreign demand for US financial assets, particularly Treasury bonds.
Miran argues that this international appetite forces the US to incur significant fiscal deficits to meet the growing demand, which in turn keeps the dollar overvalued, hurting American exporters and perpetuating a trade imbalance. However, this theory is flawed on several fronts.
- Temporal Inconsistency: The US began experiencing persistent fiscal and trade deficits around the mid-1970s, with both trends starting roughly simultaneously. The foreign accumulation of dollars as a motivating factor became prominent only after the 1997 Asian financial crisis.
- Selective Trade Deficit: The US doesn’t have an overall trade deficit but rather a surplus in services. This pattern suggests a comparative advantage, not a disadvantage. For instance, Apple profits from selling iPhones globally while manufacturing is done in China and India.
- Interest Rate Paradox: If foreign demand for US Treasury bonds were truly excessive, it should manifest as high bond yields. Yet Miran claims these yields do not reflect such a premium, leading to a contradiction.
Miran’s argument also overlooks simpler policy solutions. If foreign demand for Treasury bonds were indeed problematic, Congress could simply reduce fiscal deficits and lower bond issuance, potentially decreasing interest rates and boosting domestic production.
Furthermore, Miran’s proposal for coordinated dollar devaluation, backed by foreign central bank interventions, would complicate US debt financing. It also ignores the role of other factors in global trade imbalances, like China’s consumption deficit and trade barriers faced by US companies.
Ultimately, Miran’s theory may explain the Trump administration’s hostility towards the financial system it once championed. But a more balanced approach, involving negotiations with trading partners, would better address underlying issues without undermining the dollar’s international standing.
