Prof. Schlevogt’s Compass No. 40: The global reserve ratchet – How dollar rule locks trade deficits

Why supplying the world’s money pressures the US to import more than it exports, and why the imbalance is so hard to reverse

“Money promises abundance, only to return want.” (The Author)

In its disquieting force, this dictum cuts through the allure of monetary power to expose its central paradox: Abundance may broaden choice at the outset, only to unsettle balance and narrow freedom over time, as advantage matures into obligation.

The global supremacy of the dollar bestows upon the US an extraordinary latitude, permitting it to borrow on exceptionally favorable terms and thereby opening a wide spectrum of spending possibilities.

Yet over time, persistent budget deficits build into a mountain of debt, as the costs of debt service, compounding year by year, absorb an ever greater share of resources and progressively constrict the scope of policy choice. And still this is but one turn of the screw.

The Lex Boomerangi: America’s degradation from without

Issuing the world’s reserve currency does more than invite fiscal laxity; it warps the economy from the outside in. This is the law of the boomerang applied to money: global liquidity, domestic costs. As the systemic price of dollar supremacy, liquidity curdles into liability, and dominance hardens into dependency.

The so-called “exorbitant privilege” of reserve-currency status is not merely a financial distinction; it is a structural condition that quietly rewrites the nation’s external accounts, distorting incentives, and redistributing opportunities and risks, gains and losses, across regions, communities, and sectors.

With the passage of time, reserve-currency status leaves a familiar and deep-seated imprint on the US economy: not only chronic budget deficits and exponentially mounting debt, but also persistent trade imbalances and the gradual hollowing out of the industrial core, fueling populist revolt.

To begin with, the dollar’s global dominance distorts the terms of international exchange. A humble hand tool makes the logic plain.

Balance-of-payments mechanics: A vicious closed circuit

A ratchet turns only one way; in much the same fashion, reserve-currency dynamics, unfolding through iterative, self-reinforcing loops, propel trade disparities forward that are far easier to deepen than to undo. A brief recourse to the fundamentals of international economics renders the forces at work intelligible.

The balance of payments is the ledger of all economic transactions between a country and the rest of the world. It is governed by an unforgiving arithmetic rooted in the principles of double-entry bookkeeping on a planetary scale. Every flow gives rise to equal debit and credit entries, appearing as a payment or receipt matched by a corresponding financial transaction that changes assets or liabilities.

As the economy’s closed circuit, the balance of payments constitutes an accounting identity, an equation that admits no exception. By definition, the current account (encompassing trade in goods and services, net primary income from abroad, and unilateral transfers) and the capital and financial accounts (recording cross-border capital and financial claims) must exactly offset one another.

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Accordingly, a deficit on the current account necessarily finds its counterpart in a surplus on the capital and financial accounts taken together, and conversely. This implies that the totality of trade flows, tied to the production of goods and services in the real economy, together with income and transfer flows, are matched in the aggregate by corresponding capital and financial flows. The practical consequences of what appears to be an arcane accounting identity extend far beyond the ledger.

From the liability side, a country whose imports exceed its exports in current-account terms must, as a matter of accounting necessity, be a net borrower from abroad.

In monetary terms, there is no such thing as an external dissipation of funds. Every dollar that leaves the US must, by definition, ultimately find its way home, reappearing as a claim on the domestic economy. The consequence is nothing short of momentous.

Whenever dollars flow abroad to satisfy global demand for the greenback, they can do so only through an external deficit. In current-account terms, the US is compelled to absorb more goods, services, income, and transfers than it dispatches abroad, as corresponding capital and financial claims return upon the domestic economy.

To the extent that dollars flow abroad to pay for imports, they must, by necessity, return as foreign purchases of American assets. Every container ship departing Shanghai laden with goods is mirrored somewhere in New York or Washington by a corresponding external claim on US assets, taking the form of Treasuries, equities, real estate, or the simple holding of dollars in American bank accounts. By virtue of this operating logic, world reserve status entails grave implications over the long run.

The Triffin Dilemma: A hard-wired reserve-currency constraint

In a dollar-based global order, the balance-of-payments identity, as time accretes, hardens into a macroeconomic constraint of a structural kind. At the heart of this configuration lies the systemic necessity known as the Triffin dilemma.

Modern finance can recycle dollars, but it cannot conjure them ex nihilo. An individual central bank abroad may acquire dollars in the market, yet the world as a whole can expand its dollar reserves only insofar as the US supplies them. Succinctly stated, the foreign-exchange market moves money; it does not mint it.

In practice, the system’s logic renders the US structurally prone to large chronic deficits on its balance of trade. To convey a sense of the scale: Merchandise imports exceeded exports by more than one trillion dollars in 2025.

A surplus in services trade and net income receipts do no more than temper the immense imbalance, permitting the steady accumulation of dollar-denominated claims abroad, the counterpart through which the gap is financed.

In balance-of-payments accounting, these regular outcomes register as persistent current-account deficits matched by relentless capital and financial inflows.

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Secular dollar appreciation: A quiet tax on US exporters

To the detriment of the US, the massive offsetting capital and financial imports do not arrive neutral.

For a start, these inflows entail a progressive surrender of claims on domestic assets. This means that a growing share of ownership rights, and of the future income they confer, passes abroad. The fateful consequence is a steady narrowing of the nation’s economic autonomy, and with it the very foundations of sovereignty.

As foreign ownership of US assets expands, the interest, dividends, and profits flowing abroad rise in tandem. Over time, America’s external position comes to rest less on what it sells abroad than on global confidence and foreigners’ enduring inclination to hold US assets.

Beyond this, global demand for dollar assets bids up the currency, lifting the dollar above its trade-consistent equilibrium. This amounts to a silent tax on American exporters, levied so that the rest of the world may hold more American money. The effect is to shift the burden of global liquidity away from the trading desks of Wall Street to the shop floor.

The McKinsey Global Institute (MGI) estimates that reserve-currency demand alone may keep the dollar overvalued by some 5–10 percent. By pricing American goods out of foreign markets while subsidizing imports at home, this price distortion depresses US export revenues by roughly $30–60 billion a year. Each additional five-percent appreciation of the dollar adds roughly another $30 billion to that burden.

Because the dollar anchors global trade and reserves, foreign actors readily absorb US liabilities in lieu of goods, blunting the exchange-rate correction that would otherwise restore external balance.

Absent reserve-currency status, deficits would, as a rule, exert downward pressure on the currency, raise competitiveness, and lift net exports until the trade gap is closed. The dollar’s exceptional role arrests this salutary adjustment, entrenching deficits that would in ordinary circumstances correct themselves.

In the language of economics, the dollar’s persistent overvaluation is described as a “secular” trend (from the Latin saeculum, meaning “age” or “generation”): a long-term, structurally driven shift that endures across business cycles.

This upward tendency does not preclude intermittent episodes of pronounced depreciation. One such deviation from the long-run trajectory occurred in 2025, when the dollar declined by roughly 8 percent on a broad, trade-weighted basis, with losses approaching 10 percent against the major currencies, representing one of its weakest annual performances in recent years.

Sustained dollar appreciation begets structural deficit: persistent trade gaps, mirrored by the expanding foreign ownership of US assets. The red ink in trade statistics, together with the concomitant current-account deficits, is not a malfunction of the system or a mere policy error, but the system’s central mechanism and its price: the real-economy expression of a global financial regime centered on the dollar.

In essence, America lives on goods it does not make and leaves behind claims it cannot escape. To compound the predicament, the dollar’s hegemony, hard-wired into the global monetary architecture, carries repercussions that extend far beyond trade, reaching into the very foundations of industry and the power that rests upon it. Heavy indeed rests the crown of the world’s currency.

[Part 3 of a series on the global dollar. To be continued. Previous columns in the series:

Part 1, published on 16 January 2026: Prof. Schlevogt’s Compass No. 38: Dethroning the green god – Venezuela and Petrodollar conspiracies;

Part 2, published on 30 January 2026: Prof. Schlevogt’s Compass No. 39: The exorbitant privilege trap – How dollar power ensnares America]