There is, at least in my view, a lot of sloppy analysis about the role the dollar's reserve currency "status" plays in financing the US external deficit.

I understand how reserve accumulation funds the deficit, but not how the "status" of the dollar does ...

1/ many There was a time when reserve accumulation by the large surplus countries in Asia mapped perfectly to their external surplus, and their reserve accumulation really did generate large financial inflows into the US

2/

A few thoughts on the JGB sell off last week, as I was surprised that there wasn't a stronger big for duration from Japanese investors pushed out of the JGB market over the last 10ys by low yields and a flat yield curve --

1/ For quite some time, Japanese banks were pushed out the curve by a flat curve (especially in a world where YCC limited yields on bonds out to 10ys) --

(chart is just for the regional banks and shinkin, and it is from April 24)

2/

The fact that the Ireland "imports" EUR 50b in IP via royalty payments (mostly to the US) -- and the fact that Ireland now imports EUR 175b in services from the US -- should help frame most discussions of services trade ...

1/

https://twitter.com/Aidan_Regan/status/1927098024997589476

I have highlighted how goods trade is heavily influenced by tax avoidance -- with pharmaceutical trade being the best example. Once you take out tourism (and education) though services trade tends to be much (and I mean much) more distorted ...

2/

Trump has been relatively clear on this.He is looking for unilateral concessions from trading partners + acceptance of the base tariff. EU equally has been clear that it wasn't willing to accept this structural set up. From a good NYT piece by @jeannasmialek

1/ I understand why most folks in the market are discounting Trump tariff threats, but I remain worried -- there just isn't a willingness in Europe to do the unilateral concessions Trump insists are needed.

2/

Not sure the global savings glut has ended -- at least not the East Asian savings glut (long-term rates in China and Korea and Taiwan are very low).

Do see evidence tho that the mechanics of intermediating that glut into the US market aren't working right now

1/ many

https://twitter.com/acrossthecurve/status/1926139718837645807

Why do I think there is still a savings glut? Well the savings rate in North east Asia (NIEs, China, Japan) is ~ 40% of regional GDP, which is VERY high (China is high, China is a rising share of the total)

2/

Apart from reflecting a misguided view of America's economic and diplomatic interest, the threatened 50% tariffs on the EU are big -- imports from the EU are 2 pp of GDP, the just pay it cost is ~ 1 pp of GDP. That's well over 2x the term 1 trade action v China.

1/ What's more, the reported US asks of Europe reflect a rather stale and dated conception of how to rebalance the bilateral trade relationship -- I was expecting/ hoping for more out of USTR

2/

ft.com/content/9a9077…

It is going to take more than a G-7 communique -- and tariffs -- to bring China's trade imbalance down. Lots more talk about imbalances recently. But no change in trend. China's goods surplus has topped $1.1 trillion. Its manufacturing surplus now rounds to $2.0 trillion

1/ The rising surplus reflects both renewed nominal export growth (volumes are growing even faster, 10-15%) and weak imports ... with manufacturing imports (including parts for reexport) of $1.5 trillion relative to exports of nearly $3.5 trillion -- a huge gap

2/

In Japan's low for long era (with a flat curve out to 10ys, thanks to yield curve control), the Japanese banks loaded up on ultra long bonds & probably are looking to lighten up.

But there are natural buyers long-dated JGBs too

1/ The low for long era (with a different shaped curve in Japan and the US/ Europe) pushed the insurers into foreign bonds & big Japanese institutions like Post bank and Nochu as well. These institutions have yen liabilities, and thus naturally would match with yen bonds

2/

After a couple of months of weak flows, foreign demand for US bonds (in the great valuation adjusted Bertaut Judson data set) was strong in March.

March tho is stale -- it is pre liberation data, and before the dollar/ bond sell off in April.

1/ One of the reasons for relatively strong flows in March (and q1) was, well, Japan. but it is stale data. Japanese sales of Treasuries in 2024 were driven by MoF intervention.

2/

One of my pet peeves is a dated understanding of how China impacts global bond markets.

From 2000 to 2010, China's surplus was all channeled into reserves and US bonds.

That was only partially true from 2010 to 14.

And for the last 10ys?

1/ Chinese flows really did distort US markets from 2003 to 2012 (the decade of manipulation, to use a C. Fred Bergsten term). But the visible flows have stopped over the last 10ys (even taking into account custodial holdings)

2/

Lots of signs that the trade negotiations with US allies aren't going especially smoothly (the Japanese signaled through the FT that any deal was unlikely before their elections).

This shouldn't be a surprise -- the Trump "offer" isn't particularly appealing

1/ The offer, as I understand it, is that other countries should come forward with concessions to rebalance trade, and in return the US wouldn't raise the "base" tariff (10%) to the "reciprocal" tariff (20% for Europe, 24% for Japan) -- and would keep the 232s (likely at 25%)

2/

China's surplus has increased a lot -- but it still should be a bit higher ...

A new blog, one with important implications for the IMF

1/

cfr.org/blog/somewhat-… The core point -- China's current account surplus has jumped in a real way, to around $600-700b a quarter (well above the absordly low $200b a quarter of last year)

2/

Interesting data release. Technically, China's holdings of long-term Treasuries did fall, even after adjusting for Belgium/ Euroclear (adding in Luxembourg/ Clearstream wouldn't change the story)

But March holdings are above January holdings - the fall is only v the February rise And there is a discrepancy between total holdings of Treasuries and holdings of long-term Treasuries (notes); bill holdings reached $85b -- v under $20b at this time last year

I still more of a move to reduce duration than any real move out of the dollar

2/

What happened to the Taiwan dollar on May 2nd, and what does it mean for Taiwan and the global economy?

And what should Taiwan do to limit the risks that any future move causes trouble in its huge life insurance industry?

1/ These are all topics covered in my new piece in FT Alphaville --

2/

ft.com/content/d71c34…

A few reactions to a thought provoking post from my friend @adam_tooze over the weekend. Some rather technical reactions, but also some big think reactions --

1/

adamtooze.substack.com/p/chartbook-38… First, a clarification -- Adam (correctly) notes that my goods imbalances chart differs from the CFR global imbalances tracker. The CFR is not the IMF; we don't coordinate: I no longer trust the Chinese current account data so have moved to goods, my colleagues have not!

2/

With an assist from @Mike_Weilandt, I tried get a more refined estimate of the Trump term 2 tariffs.

Bottom line upfront: I think the tariffs now in place have a "just pay it" cost of about 1 pp of US GDP, which could rise toward 1.5 pp of GDP if all the 232s end up at 25%

1/ First, the China tariffs -- the 20% fentanyl tariff (which stacks with the 232 sectors) has a just pay it cost of about 0.3 pp of GDP. The 10% base tariff (which doesn't apply to 232 sectors) adds another 10 bps of GDP.

2/

There were a lot of forecasts that the Chinese auto export wave would peak in 2024. It hasn't quite happened though. Dollar exports have plateaued. But actual exports of cars continue to creep up -- April 2025 was very strong

1/ Passenger exports should reach 6m cars in 2025 (net exports of 5m cars)

And most exports will be cars with conventional engines, not EVs

2/

Expect to hear a lot of wildly inflated claims about future Saudi investment in the US over the next few days.

Don't tho expect to hear any details about how the Saudis will pay for these investments.

1/ The simple reality is that the Saudis cannot fund their current levels of domestic spending and investment out of their current oil proceeds. As the chart below shows, the Saudi external (current account) break even is around $90 a barrel, way above spot oil

2/

May 12th is a special day for me. I can not imagine getting more meaningful (to me) professional recognition than I received exactly two years ago from Paul Krugman.

What's more, it was for an issue that is now much more prominent: pharmaceutical tax avoidance! 1/ The underlying issue is simple -- after the 2017 Tax Cuts and Jobs Act, America's major pharmaceutical companies (the top 6, aka "Big Pharma") have more or less stopped paying any US tax on the current earnings

2/

nytimes.com/2023/05/12/opi…

A bit of ballpark tariff math

I think the new tariffs on China are 30% on about 1.2 pp of US trade, & 20% (the fentanyl IEEPA case) on 0.3 pp of US trade, so a "just pay it" cost of just over 0.4 pp of US GDP (more than the first 301 case, which applied to a bigger base)

1/ I think the 30% tariff "stacks" with the legacy section 301 tariff, so for a number of goods (~0.5 pp of current US trade) the tariff will be around 55%, and I think the 20% tariff stacks with the 232 tariffs -- which will matter for chips

2/

Wonder if rural Americans really appreciate being used to sell a set of tax changes that benefit Big Pharma, Apple and Microsoft (keeping GILTI at 10.5%)* and Google, Meta and Nvidia (keeping FDII at 13.125%)

*50% of headline

1/

https://twitter.com/George_A_Callas/status/1921019988447551704

The push to extend tax provisions that reward offshoring both intellectual property and jobs -- pharma imports soared after the TCJA -- highlights the absolute incoherence of the Administration's current legislative agenda.

2/