Thread by @bauhiniacapital

@Citrini7 Ask yourself what you think a reserve currency is.

Is it the fact of a stock of financial assets in a currency?

Or is it a propensity to have a flow?

If the trade deficit (flow) immediately goes to zero, the stock remains unchanged.

Other flows shift. Americans net save.

@Citrini7 Americans consume less (because they save more). They produce more to consume what they cut off from the outside world. Jobs which were related to consumption become jobs related to production. All fine. The savings finance the part of the govt deficit no longer financed by

@Citrini7 foreign flows, but until the budget deficit falls to the level of the current trade deficit, there’s an excess which has to be funded by someone (as a flow). If that is funded by foreigners, you still have the same ‘reserve currency’ ownership of stock AND new inflows ‘problem.’

@Citrini7 If you need foreigners to have zero net inflow of capital into the US (but retain the same stock), then American savers pick up the slack.

If American savers pick up the slack by increasing savings to an extent to cover the part of the budget deficit not covered by the

@Citrini7 elimination of the trade deficit, that comes out of consumption again. So…

1) Americans reduce consumption to balance trade and increase savings.
2) Then Americans reduce consumption again to finance the other (budget deficit less trade deficit) portion.

How does this work?

@Citrini7 In a nutshell? “Financial oppression.” Higher inflation, lower earnings on savings.

The only OTHER way out of this is massive productivity growth. But productivity is essentially just translated as ‘lower costs’.

That can be lower cost raw materials, lower cost of mfg, etc.

@Citrini7 Continuously lower costs implies no scarcity in inputs. No scarcity of inputs means disinflation, or deflation, and it means less money spent on labour. Lutnick on Fox talking about bringing back automated garment manufacturing to the US is a perfect example:
1) minimal new job

@Citrini7 count to produce lots more apparel in the US. Overall drop in consumption (lose lots of jobs related to consumption, replace them with some jobs and more robots in mfg).

Who wins there?

Michael Pettis is a supporter of the trade/capital/balance argument (which is not unsound

@Citrini7 in and of itself as a balance, but may be unsound/outdated in terms of practical causality) and he argues that the reason for the trade imbalance with China is the functional repression of Chinese households (and the earnings/risk on savings) by the govt, favouring producers.

@Citrini7 The philosophical problem with that is that the deficit countries, in order to redress that imbalance, have to act more like the people they criticise.

The US has to
a) lower the return/risk ratio on US financial assets AND oblige Americans to buy more of them and foreigners

@Citrini7 to buy less.
b) encourage lower real interest rates in a more closed economy, creating inflation to support jobs, which means US equity 'savers' further have to buy more low-returning bonds, or
c) US mfg sees a jobless renaissance

Pettis' piece here.
carnegieendowment.org/research/2024/…

@Citrini7 because of automation and AI, which supports equity capital returns at the expense of labour share of GDP (automation/AI takes some of the labour share of GDP and gives it back to capital, through capex in automation and AI).

These are all choices.

@Citrini7 a) is basically financial repression.
b) is really bad for equity markets (rich people)
c) is really bad for the lower half of the economy which effectively become a burden of (and therefore serve) the State.

@Citrini7 Every imbalance in global economics is simply a balance you don't like.

There is a stock, and a flow.

If you don't like the flow, it means you reverse the conditions which got you here.

If you don't like the stock, you reverse them even more.

If you do not like the

@Citrini7 "imbalance" of results that gets you to the current equilibrium, then you have to undo the policy (and effects) which got you there.

That's it. There's no magic to this.

@Citrini7 In order to do this, the US has to become more like those whom its leaders criticise. More social safety net to support automation which will repress wages which can be lower because they support less consumption. Housing price growth slows. Wealth growth slows. Equity returns

@Citrini7 become like the ones overseas. There should theoretically be decades of US equity underperformance to support that increased labour share of GDP and higher household savings into lower-returning debt. All that can accompany a lower dollar, which leads to foreigners deciding that

@Citrini7 indeed, "reserve currency" means both stock and flow. They sell the 'stock'. Americans, who are already plunking all their non-consumption into savings, consume even less and save more to buy those assets, which go down in price (and up in yield), and American Exceptionalism

@Citrini7 dies a long slow death.

"But... 'Murica!"

"'Murica!" is just one way of looking at a current equilibrium.

The other way is the way that Miller/Bessent/Lutnick/Trump view it.

MAGA implies any current American Exceptionalism is not exceptional. It's weak.

To RETVRN to an

@Citrini7 earlier form of American Exceptionalism means undoing whatever people thought was the current American Exceptionalism (and everything which happened on the way).

@Citrini7 Lots of 'isms' have a partially laudable end point.

Almost all 'isms' with a partially laudable end point involve a lot of pain to get from here to there.

Who do you repress on the way (which is a flow of repression becoming a stock of accumulated repression)? And are you OK

@Citrini7 with the accumulated repression once you get there? (which means you can halt the flow of repression and just stick with the accumulated stock).

In the end, it's all just redistribution.

@threekardashevs @Citrini7 the govt becomes a much larger percentage of the US economy. Not smaller. But the Yarvin-esque technobroligarchy strategy depends on suspension of ‘democracy’ and US becomes L.A. in the movie Elysium.

@BlankBl23041510 @Citrini7 but basically, if you have partial or full capital controls and lower real yields, that's simply financial repression by the state - financed by low returns on capital and less choice.

To get from A to B, there are a finite number of outlets and offsets.