In light of its Reserve currency status, How does the USA maintain the value of it currency in light of $\$800$ billion trade deficits that have accumulated to over $\$12$ trillion as pointed out by President Trump. How does it still manage to keep its reserve currency status


The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!

— Donald J. Trump (@realDonaldTrump) March 3, 2018
  • $\begingroup$ The argument is that if the rest of the world wants US dollars to use as reserves or as currency for transactions outside the US, it can acquire these dollars from net exports to the US $\endgroup$ – Henry Mar 9 '18 at 12:43
  • $\begingroup$ but why does dollar value relative to other currencies not drop significantly in light of the trade deficit? $\endgroup$ – securitydude5 Mar 9 '18 at 13:37
  • $\begingroup$ Can you please back up your numbers with references? $\endgroup$ – Giskard Mar 9 '18 at 14:39
  • $\begingroup$ twitter.com/realDonaldTrump/status/969991653393039361 $\endgroup$ – securitydude5 Mar 9 '18 at 15:10
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    $\begingroup$ Deficits actually increase the foreign trade value of the dollar. This is because foreigners purchase T-bills and, in doing so, "consume" overseas dollars (that otherwise might be spent to buy US goods -- supply and demand). IIRC, about a third of T-bills are sold overseas. Deficits are largely responsible for the lack of wage growth since the early 70s. $\endgroup$ – Hot Licks Mar 9 '18 at 18:41

Trade deficits enable to export USD-denominated debt which is held by others, which is extremely linked to the ability to maintain reserve currency status.

If the US were to pay off all its debt, or otherwise recall all USD-denominated debt to the US, or stop other means of exporting USD, then there would be less volume and liquidity of the USD. This would tend to reduce the importance of the USD in the international system, and thus reduce its use as a reserve currency.

As for the exchange rate itself, various indicators and metrics are presumably of differing relevance in different times and contexts. But surely they can be more or less summed up by some notion of a) demand to hold/use USD and b) supply of USD-denominated financial instruments.

In sum, trade deficits help to export USD which ensures volume and liquidity that underlies the reserve status, and that liquidity itself provides a stability which underlies much demand to hold and use USD.

(Also, yes, please, check your numbers.)

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  • $\begingroup$ The other major factor is investment flow. If foreign interests buy an office tower in NY from US owners and the latter spend the proceeds on French champagne, this will show up as a trade deficit for the US. $\endgroup$ – Keith McClary Mar 10 '18 at 17:23
  • $\begingroup$ @Keith McClary a trade deficit is when net imports exceed net exports. if US owners spend more on French Champaign than they recieved for their office tower. e.g The office tower was sold for $50 million but the US bought $60 million worth of Champaign. The deficit is $10 million. assumint trade only consisted of Champaign and buildings. In reality trade deficits or surpluses are calculatd by tallying ALL exports and Subtracting the tally of ALL imports if the figure is positive then there is a trade surplus. If its negative, there is a deficit $\endgroup$ – securitydude5 Mar 11 '18 at 11:50
  • $\begingroup$ @securitydude5 Of course I meant that the champagne will show up in the deficit tally. My point was that investment in an office tower is not considered "trade" in goods and services and does not show up in the surplus tally. $\endgroup$ – Keith McClary Mar 11 '18 at 15:27

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