The Trump administration and China's leaders generally differ on economic policy, but on one proposition some prominent members of their economic teams seem to agree: The dollar's status as the world's dominant reserve currency is a main driver of America's large and persistent current account deficits.
That this proposition is wrong has not prevented its confident assertion. President Donald Trump's former Council of Economic Advisers chair Stephen Miran, currently a Federal Reserve governor, wrote that "America runs large current account deficits not because it imports too much, but it imports too much because it must export [US Treasuries] to provide reserve assets and facilitate global growth…." And more recently, People's Bank of China governor Pan Gongsheng stated that "major deficit countries"—read, the United States—"remain the same over the years, which is related to the inherent flaws of the international monetary system," namely, that "the country issuing the major reserve currency can sustain longstanding deficit spending with relatively low financing costs, and export its currency through sizable current account deficits."
This theory is based on a large and persistent deficit in understanding.1 It fundamentally misconstrues how international financial markets work—harmfully so, because it deflects attention from the main major drivers of current account imbalances today. Those include the unsustainable US federal budget outlook and China's failure to shift its economy further toward a non-deflationary, consumption-driven growth model, both of which would be easier to modify in the medium term than the dollar's global role.
How the world gets dollars
The dollar's role as a reserve asset for central banks and sovereign wealth funds is the one that grabs the most media attention, but the greenback fulfills a range of other key roles in the global economy that are arguably even more important: vehicle currency, invoicing currency, funding currency, and anchor currency. The dollar is also the currency of choice for illicit transactions. Because of these roles, the dollar is widely used outside of the United States, including in transactions where neither party is a US resident.
It has been a common belief that somehow these offshore dollars, including the dollar reserves held by non-US authorities, have to "leave" the United States through US current account deficits. This belief is dead wrong.
For one thing, the world outside the United States can get dollar assets such as Treasuries by selling assets rather than goods to Americans. Contrary to Miran's account above, the United States can "import" foreign assets rather than foreign products with the proceeds of its asset sales to foreigners. In many cases, such exchanges allow both parties to diversify financial risks; in others, US financial institutions act as intermediaries between lenders and borrowers in different countries. In these examples, the current account balance doesn't change because the US financial account registers offsetting balance-of-payments credits and debits.
To take an example presaging current events, the Iranian revolution of 1979 led to global oil-price hikes and large surpluses by members of the Organization of the Petroleum Exporting Countries (OPEC). They wished to accumulate dollars, but rather than responding with a bigger current account deficit, the United States, through its banks, recycled these "petrodollars" into loans to developing countries. America exported dollar assets to OPEC but imported developing-country loans. While the episode did not end well—many developing-country borrowers ended up defaulting in a debt crisis that started in 1982—the example shows that big increases in desired foreign dollar investments need not force the US current account balance to fall correspondingly.
The potential for offshore dollar creation goes much further than this example, however, and has nothing to do with the US current account. If a multinational corporation deposits dollars in a Dubai bank, for example, and the Dubai bank deposits them in a London bank that lends them on to a different customer, a new dollar deposit will be created at each stage in the chain of transactions. There will be multiple instances of dollar deposit creation offshore, as within the US domestic banking system, but with no transaction crossing the US border. Indeed, this is how the Eurodollar market arose in London during the 1960s, a period of US current account surpluses.2
As noted above, critics of the dollar's global role have argued that foreign official dollar purchases (labeled US incurrence of official liabilities in the figure below) feed one-for-one into US current account deficits. To illustrate the true loose relationship between these two variables, the figure shows both of them over the 2003–25 period, as percentages of GDP. US net incurrence of liabilities to official holders, reported with a minus sign as in standard balance-of-payments methodology, is usually far too small to mirror the US current account deficit. And since roughly 2014, net official financial inflows have fluctuated around zero as the current account deficit has widened.3
To be sure, the strong international demand for dollars may make the dollar stronger against foreign currencies than it would be otherwise, leading to a weaker US current account position. According to some estimates, this effect could explain a portion of the deficit as big as 2 percent of GDP. In my opinion, such large numbers rest on partial-equilibrium logic and should be taken with a grain of salt; and while they imply a smaller current account balance, they do not necessarily imply a negative balance and certainly not a rising negative balance, especially when foreign dollar reserve holdings have been shrinking relative to global economic activity (as figure 1 also implies).4 The euro is the world's second reserve currency, yet the euro area has a current account surplus. Britain had surpluses up until World War I despite issuing the world's premier global currency and hosting its leading financial center.
The stablecoin connection
One aspect of US policy—the promotion of global use of dollar stablecoins—may lend limited support to the theory that increased demand for the dollar requires a larger US current account deficit. Intended to enhance the dollar's primacy and substantially ease the US Treasury's borrowing costs, thereby shrinking the federal budget deficit, more demand for dollar stablecoins around the world may not be a gamechanger for either objective. But it could marginally raise US net external borrowing.
With the July 2025 enactment of the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act to regulate stablecoins issued in the United States, the US Congress moved to mainstream stablecoins within the US and global financial systems. In Treasury Secretary Scott Bessent's words, the aims were to "buttress the dollar's status as the global reserve currency, expand access to the dollar economy for billions across the globe, and lead to a surge in demand for US Treasuries, which back stablecoins." Implicit in these goals was the hope that residents of foreign countries would embrace stablecoins en masse, with Bessent predicting as much as $3.7 trillion in eventual global demand.5
GENIUS-compliant stablecoins must be backed by US bank demand deposits, short-dated Treasury securities, or a limited set of other designated assets: hence Bessent's hope that a surge in demand for the coins will generate a comparable surge in demand for short-term Treasuries or close substitutes, lowering the government's borrowing costs.6 If US residents switch from bank deposits into stablecoins, the net increase in demand for Treasuries could be minimal, though; for example, the banking system could sell Treasuries to pay off deposit withdrawals. If a palpable increase in Treasury demand is to occur, higher demand for dollar stablecoins must most likely come from abroad, reversing a foreign direct demand for Treasury debt that has been shrinking as a share of total outstanding Treasury liabilities. At the same time, higher foreign demand for dollar stablecoins might displace foreign currency holdings in favor of the dollar.
But how will foreign residents obtain stablecoins? Residents of creditworthy countries could borrow or sell other domestic or foreign assets to foreigners and use the proceeds to buy GENIUS-compliant dollar coins. They might even hold dollar assets (such as Treasuries) already, which they could sell. In other words, countries with good international credit could fund their dollar stablecoin purchases—generally financial outflows—with financial inflows, implying no change in their current account balances.
Residents of less creditworthy countries who hold dollars in US accounts (often skirting domestic law) could simply spend them on stablecoins. Argentines reportedly hold $271 billion in offshore accounts (and stuffed in mattresses), which they could use to buy US stablecoins—but the offshore funds would come from their bank deposits, money market funds, or other US sources, perhaps resulting in little net increase in demand for Treasuries. In this case, too, there is no change in the current account of the country whose residents import stablecoins, just offsetting financial account credits and debits.
Even emerging markets with residents who do not hold substantial assets offshore are likely to see big increases in dollar stablecoin demand, to the detriment of their monetary policy sovereignty. In those economies, such demand is already high in relation to GDP. What's more, residents of poorer countries often have incentives to evade capital controls, hide transactions for other reasons, escape volatile domestic inflation, or overcome costly correspondent banking arrangements. If the stablecoins pay no interest, as the GENIUS Act mandates, the resulting seigniorage—the rent that accrues to an issuer of interest-free money—would be harvested by the private dollar stablecoin issuers, although the Treasury would share those gains if its borrowing costs decline.
Because poorer countries are also less creditworthy, those without big foreign asset troves have limited access to financial inflows from abroad and would have to earn most of the funds needed to buy stablecoins through bigger current account surpluses.7 Those surpluses would not necessarily be with the United States: Countries could earn euros through bigger surpluses with Germany, for example, and sell them for dollar stablecoins issued anywhere. In aggregate, however, the rest of the world (including the United States) would have to run higher deficits equal to the developing economies' higher surpluses. But because the demand for the stablecoins is effectively a demand for the dollar assets backing them, the result would be upward pressure on the dollar, adding to similar pressures coming from richer countries' sales of non-dollar assets to buy dollar stablecoins, and therefore a relatively bigger fall in the US current account balance. The driving mechanism in this case describes an instance where Governors Miran and Pan are correct that higher foreign dollar demand requires a bigger US current account deficit. But the quantitative effect is likely to be limited.
A final source of foreign resources for stablecoin purchases is the stock of dollar bills—estimated at around $1.2 trillion dollars—that circulates outside the United States, mostly in the underground economy. This sum is a source of seigniorage for the US government, in effect representing an interest-free loan from the rest of the world worth nearly $50 billion per year at a 4 percent rate of interest (roughly the average Treasury borrowing fate). Were all those funds to flow into stablecoins—a technology for managing concealed cash that is far superior to the Argentine mattress—a big chunk of Treasury revenue would move to stablecoin issuers, who could realize their seigniorage gains by buying Treasuries.
Right ways and wrong ways to reduce global imbalances
The dollar's global role is not a primary reason that the United States has a big and persistent current account deficit, although dollar dominance does strengthen the dollar to a degree and so helps make the US balance lower than it would be otherwise. Reducing the US fiscal deficit materially and sustainably is the most important US policy prerequisite for global current account rebalancing. Doing so will be good for the United States. The process will be much better for global growth and trade if China does its part too by rebalancing its economy internally and encouraging domestic consumption.
In this effort, stablecoin gimmicks distract from the need to reduce US government spending and raise taxes durably; they will even widen the US current account deficit slightly, while making the international money flows that finance it harder to track. The ease of obtaining stablecoins just about anywhere will greatly complicate financial account management for governments. Aside from other disadvantages, data opacity—which amounts to putting heads in the sand—will certainly not promote good policies for fiscal prudence and global rebalancing.
Governors Miran and Pan's concerns about the dollar's effect on global imbalances are overblown. More important for the international monetary system are the huge efficiencies in global trade and finance that flow from the dollar's role as global currency. That role has also benefited the United States specifically, not least by giving America a powerful tool of economic statecraft. Now, economic partners' fears that the tool will be used for predation, along with a raft of other factors, threaten to slowly erode the dollar's singular status. These forces may prove too strong for Bessent's stablecoin imperialism.
Notes
1. The intellectual deficit reaches back at least to a 2011 Foreign Policy article and continues in work published by the Journal of Economic Perspectives (2013), the New York Times (2014), Yale University Press (2020), the New York Times (2024), the Information Technology and Innovation Foundation (2024), and Xponance® (2025). Some of these writers refer to the famous economist Robert Triffin, but Triffin never embraced the fallacy. Perspicacious analysts such as my colleague Arvind Subramanian have also avoided it (see his discussion of the potential for the renminbi to become a major international reserve currency). An older and cruder version of the misconception holds that all the dollars held abroad have physically exited the United States. While this is true for a limited stock of dollar notes, as I discuss below, it is not true for the bulk of offshore dollar holdings.
2. Milton Friedman explained multiple deposit creation in the Eurodollar market in a famous 1969 paper.
3. A similar interpretation is here. Aside from the official inflows to the United States shown in the figure, foreign authorities can accumulate dollar reserves that are not direct claims on the United States—another reason why foreign countries' reserve purchases are only loosely linked to the US current account deficit (as explained in this IMF Economic Review article and this Brookings Paper on Economic Activity).
4. More evidence on this point can be read in this Brookings Paper on Economic Activity.
5. Trends of the last few months would have to accelerate to reach this target anytime soon.
6. The Treasury has been reducing the duration of its liabilities, making more short-term Treasury debt available to the market.
7. Similarly, Ecuador's dollarization of its economy starting in 2000 was helped by oil-driven export surpluses, which facilitated dollar acquisitions.
Data Disclosure
This publication does not include a replication package.
Author's note: Helpful comments from Greg Auclair, Martin Chorzempa, Nell Henderson, Helen Hillebrand, and Adam Posen are acknowledged with thanks. All errors and opinions are mine alone.