Raghuram Rajan: Who says the dollar is an exorbitant burden for America?

A paper by Stephen Miran, published before he was nominated to chair US President Donald Trump’s Council of Economic Advisers, does precisely this. Since his views likely reflect those of the administration, they warrant close attention.

The traditional view of why the US runs chronic trade deficits is that it overspends, owing largely to its fiscal deficits (the ‘forcing variable’). But the true forcing variable, Miran argues, is the rest of the world’s hunger for US financial assets, especially Treasury bonds. 

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Foreigners want ever more US Treasuries for their foreign-exchange reserves and for financial transactions, and the US has had to run large fiscal deficits to meet this exorbitant demand. The resulting capital inflows keep the dollar too strong for US exporters to compete, leading to persistent trade deficits.

The argument is unpersuasive. First, consider the timing. The US started running a steady trade deficit in the mid-1970s. It began running a steady fiscal deficit around the same time, with the exception of the late 1990s, when capital-gains taxes and private consumption soared because of the dot-com boom, temporarily shifting the locus of US overspending from government to households.

While foreigners have been buying US financial assets for a long time and US entities have been repaying the compliment, the ‘forcing’ effect of dollar accumulation by foreign central banks really took off only after the Asian financial crisis of 1997, when East Asian economies, seared by the harsh conditions imposed on them by the International Monetary Fund, built reserves to guard against sudden stops in financing. Again, the timing is off.

Moreover, the US does not run a uniform trade deficit. Rather, it has a trade deficit in goods and a net surplus in services (nearly $300 billion in 2024). When economists encounter that kind of pattern, they see orthodox comparative advantage at work, which benefits the US. 

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Apple reaps large profit margins selling its superbly designed iPhone (and its software) to the world, while Foxconn gets tiny margins making iPhones in China and India. Although overall trade numbers may reflect a large deficit, the US is far from being a victim.

Another problem is that any excess demand for US Treasuries across the world should show up in a huge excess premium for US bonds. Yet, Miran complains that US bond interest rates don’t reflect such a premium, giving the US little benefit from producing high-demand financial assets. This seems strange. Why would such demand hold up the dollar but not push down US bond rates?

The simpler explanation is that the US Congress spends as it wishes, relying on the rest of the world to buy Treasuries to fund what domestic revenues cannot cover. Has there ever been a member of Congress who says the US should run deficits to accommodate the world’s need for Treasuries? If excess demand for US financial assets was really such a problem, the US Congress could simply run smaller deficits, have foreigners scramble to buy smaller bond issuances, and thus orchestrate lower US interest rates (and higher US production).

Moreover, if creating reserve assets is such an exorbitant burden, why not let other countries shoulder it? Far from entertaining this possibility, Trump recently threatened the Brics group of emerging economies for even daring to contemplate non-dollar payment arrangements. 

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While admitting that the US does need foreign money to fund its fiscal deficit (perhaps a tacit recognition that the fiscal deficit really is the primary forcing variable), Miran suggests another reason to have foreigners buy US financial assets and use its financial system: Doing so gives the US more ways to punish foreign countries that step out of line including, alarmingly, imposing a selective tax on Treasury interest payments.

If the US does not want to give up its exorbitant burden, could import tariffs help American manufacturers overcome an overvalued dollar? As Miran points out, tariffs will partly be offset by a stronger dollar, as was the case in 2018-19, when the US imposed sweeping tariffs on China. But a stronger dollar will hurt US exports, and if the dollar prices of imported products do not change much, it is hard to see how US manufacturers will become more competitive.

Thus, Miran sets his sights on concerted dollar depreciation, supported with interventions by non-US central banks that will be ‘persuaded’ under the threat of tariffs or a withdrawal of US defence support. But even if such interventions were effective, foreign central banks would have to sell US Treasuries and buy domestic bonds, which would make the US fiscal deficit harder to finance.

Miran should be commended for trying to explain why the US is turning against the system it built. To be sure, the US fiscal deficit is not the only forcing variable. Chinese under-consumption also contributes to global trade imbalances. 

Moreover, the US has lower tariffs than some of its trade partners, some of them subsidize business more than the US does, and some have shown scant respect for intellectual property rights. But these issues are best addressed through negotiations (perhaps supported by implicit threats).

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It is not clear where the Trump administration’s path of ‘shock and awe’ is supposed to lead. The claim that the dollar’s attractiveness is an exorbitant burden rather than privilege is unpersuasive, especially when those making such arguments are reluctant to give it up. 

Markets are unnerved by the punishment that the administration, convinced that the US is a victim, is willing to inflict on close allies. If such behaviour reduces the attractiveness of the dollar, perhaps it will become an exorbitant burden. But that is not a future that any American should want. ©2025/Project Syndicate

The author is a professor of finance at the University of Chicago Booth School of Business, former governor of RBI and co-author of ‘Breaking the Mold: India’s Untraveled Path to Prosperity’