Really fun story; and unlike most of the mythology aroud the petrodollar -- accurate!

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https://twitter.com/M_C_Klein/status/2049162554988179581

Dollar pricing of Saudi oil predates Kissinger or Simon -- Aramco was the Arabian American oil company, and before that the California-Arabian Standard Oil Company! Standard oil of Californian (now Chevron) has the original Saudi concession

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The current inability of most of the GCC countries to get oil to market is a much bigger threat to the US economy than the possibility that some GCC countries (and not just sanctioned countries) might sell some oil to China for yuan ...

1/ selling China oil for yuan also doesn't immediately crete "euroyuan" -- not if the funds are only used to buy Chinese manufactures/ held on deposit in China (as Russia and Iran have sometimes been forced to do)

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Absolutely superb synthesis of the academic and policy debate over trade and payment imbalances by Tooze --

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https://twitter.com/adam_tooze/status/2047048545119731866

I might quibble with a couple of Adam's points, just as he sometimes pushes back on a few of my arguments

But Adam gets the big picture right, unlike the IMF --

What's radically new is the scale of the surplus in manufacturirng Asia/ China

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Taiwan's willingness to do absolutely anything and everything to keep the chip boom from putting pressure on the wildly undervalued Taiwan dollar is unw=matched ...

1/ the preference for a structurally undervalued currency is very deeply entrenched. Why should Taiwanese companies pay dividends in local currency -- best to keep the chip windfall all offshore ...

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bloomberg.com/news/articles/…

Interesting WSJ story about the Emirates request for a swap line --

the UAE hasn't reported its end March reserves but it went into the conflict with tons of reserves and no shortage of liquid bills in US custodians

1/ Given the central bank's ample apparent liquidity, the immense assets of Abu Dhabi's sovereign funds and the UAE/ Abu Dhabi's clear ability to borrow dollars, I am not sure there is a realistic prospect that the UAE will ever run short of dollars

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Fx settlement is in my view the single best proxy for China's true intervention. It looks like China, Inc bought about $35b in fx in March even with all the turmoil in the oil market. That's down from the (crazy) $100b in purchases in Dec/ Jan but still big

1/ The magnitude of the purchases over the last 12ms of data $460b spot, $580b including forwards creates the basis for a Treasury finding of manipulation if it so desired --

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My work on this earth may be nearly over -- or at least my work of the last 4ys could be in its final chapter.

The FT's Big Read is on the China sock 2.0 (one of my favorite phrases) and the pink paper endorsed the concept of "shadow reserves"!

1/ This is the definitive synthesis of the macro and the micro, of currency policy and industrial policy and much more

Great piece



2/ft.com/content/7d51a6…

Joe Gagnon (@GagnonMacro) should take a victory lap; the IMF has conceded intervention does have a real impact --

"A growing empirical literature finds that such intervention can systematically generate real exchange rate depreciation and raise current account balances"

1/ I also take a bit of satisfaction in this conclusion; it explains why I have been systematically tracking official asset accumulation for close to 20 years!

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Before the global financial crisis, in 06 and 07, the US fiscal deficit was under 2 percent of GDP and note issuance was under 1 pp of GDP in 07. That was also the time of peak reserve accumulation

https://twitter.com/YanLian31677392/status/2042069508295422339

The low level of US fiscal deficit prior to the global crisis + the small stock of Treasury debt prior to the crisis, especially relative to reserves, are 2 things that many have forgotten; constantly surprised by folks who think US fiscal was an pre crisis issue

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Happy to see the IMF has noticed the expansion of global current account imbalances --

And guess what, the IMF seems to have rediscovered the idea that currency manipulation can drive imbalances (though manipulation has been renamed "macro-industrial policy" ... )

1/ many The IMF doesn't find that "micro" industrial policy has a big impact on global imbalances, only economy wide "macro-industrial policies"

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"The problem is there was never enough cash to fund all his [Crown Prince MBS] ambitious initiatives."

Indeed. That's why measures lie the balance of payments breakeven are useful. The Saudis needed $90 plus oil -- or near unlimited access to debt financing

1/ Going into the current conflict, the Saudis were borrowing $100b a year from the rest of the world (that's a form of reverse petrodollars so to speak)

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An exploration of the February US trade data -- which got buried a bit by the anniversary of liberation day.

A key question -- will the weakness in non "AI" imports in the last 12ms reverse now that uncertainty around tariff levels has disappeared.

https://twitter.com/Brad_Setser/status/2039909366103523351

Imports of computers are up massively (tho not from China) and show no sign of slowing down -- that will mechanically pull the true trade deficit (setting gold flows aside) w/o a big sustained fall in other imports

A thread on the February 2026 trade data, with some answers and some questions --

Both nominal imports and nominal exports (ex petrol) are growing again -- with surprising strength in nominal exports and nominal imports back at their end Biden administration levels

1/ I think I know why nominal exports look so strong --

One clue is that "real" exports are much weaker (but to be clear still up; the Trump 2 trade war did not lead to retaliation and lower exports)

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Petrodollar (or lack of them) update:

Saudi 2025 balance of payments data is out, and the Saudi "current account" break even oil price (based on ~ 7 mbd in exports of crude/ product) is still right around $100 a barrel

1/ the current account break even is the oil price where oil exports cover the rest of the current account -- so there is no deficit in the current account

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As I mentioned on Wednesday, there is a $3 trillion gap between China's accumulated current account surplus since the pandemic and China's unchanged reserves (and a corresponding gap in visible flows into the US)

Bank flows make up most of the difference

1/ That was true in q4 -- most of China's foreign bond purchases are done by the banks, so there was $170b or so outflow via the banks in q4 alone. That is about 2/3rds of China's reported q4 current account surplus

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Three big picture observations about the oil surplus (petrodollars/ petroeuros/ petroequities are all downstream of this) pre Hormuz

A) The oil surplus is modest relative to the surplus in Asia. Chinese state banks and offshore deposits of Chinese exporters are way bigger

1/ B) Most oil exporters are in deficit or run only modest surpluses with oil in the 60s or 70s. That importantly includes Saudi Arabia, which now has a BoP break even in the 90s

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The risk of an escalation in the Gulf seem reduced for at least a few days. So maybe there will be a bit of interest in my (somewhat novel) reevaluation of the relative contribution of Europe and China to global imbalances

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cfr.org/articles/time-… Bottom line: The second China shock has eliminated Europe's imbalance -- it all migrated to the east.

Consider the contribution of net exports to Chinese growth and to German growth over the last few years ...

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Petrodollars! Nothing produces more heated discussion and, in my experience, less insight. Myths trump facts, because the actual data is a bit obscure --

But here is the most important thing to know. Before the Hormuz crisis, the flow of petrodollars had more or less dried up

1/many At $60-70 a barrel, the oil exporters just weren't generating large surpluses --

Saudi Arabia's external deficit offset Russia's surplus, so the two biggest oil exporters (~ 15mbd of exports together) were not generating petrodollars, petroeuros or petroyuan

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Back before the bombardment of Iran, China's currency was under considerable appreciation pressure -- the settlement data showed $70b in fx purchases by the PBOC/ SCBs ($840b annualized). A huge sum for a holiday month ...

1/ Over the last 12ms of data, settlement (my preferred intervention measure) shows purchases of $500-600b ... or more than enough to trigger the Treasury "manipulation" thresholds

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Some basic oil shock math, focusing on the impact on global trade ...

Remember that we are starting from an unusually low surplus in the fuel exporting economies ...

1/ And also an unusually large surplus in East Asia.

Core east Asia looks to (per the old BP data) import ~ 20 mbd on net, so each $10b/ barrel change in the oil price reduces East Asia goods surplus by ~ $75b

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A day that was a long time coming -- TSMC's dominance of chip manufacturing led Taiwan to post a $70b quarterly current account surplus in q4. That is $280b annualized, or a surplus of ~ 33% of GDP

Never though that would be possible for a non-tax haven without oil

1/ And there is of course a capital flows story -- as the TWD depreciated in q4 in the face of this massive surplus (2x its level in 24), and Taiwan technically sold reserves too!

2/