Let’s discuss the “reserve currency curse” and its impact on the US dollar and global trade.
What Is the Reserve Currency Curse?
The advantage of the US having the global reserve currency is that it creates a demand for dollars. Nations accumulate dollars and tend to invest those dollars in US treasuries suppressing US interest rates.
The curse, especially since Nixon ended US dollar convertibility of gold, is there are no brakes on US dollar creation or US deficit spending. The US has become the global consumer of last resort.
For all the moaning by China and the BRICS nations, no other country wants the curse because it would end their export mercantilism. US trade deficits and dollar reserves are two sides of the same coin.
Europe Should Deepen Ties With Non-U.S. Trade Partners, Lagarde Says
“While the U.S. is—and will remain—an important trading partner, Europe should also aim to deepen its trade ties with other jurisdictions, leveraging the strengths of its export-oriented economy,” Lagarde told a panel at the World Economic Forum in Geneva on Wednesday.
Lagarde has previously spoken about how the European Union should bolster its institutions and economic resilience as a way to increase international prominence of the euro currency after the U.S. began to raise tariffs on its trade partners.
Michael Pettis Comments on X
To see the US trade relationship with Europe as just one of the larger of many equivalent relationships is to miss the point altogether. The US is not just another trade destination. Its main role in the global trading system is to absorb global trade imbalances. [Mish comment: This is the curse. And no country wants it.]
To reduce its susceptibility to the US, in other words, what Europe needs is not some other country with which it can trade, but rather some other country that is both willing and able to run the huge trade deficits needed to balance global trade. [Mish comment: It’s not just Europe. The whole world is in search of the impossible unless China cooperates by rebalancing.]
If no other country is able to play that role (and no other country wants to), then either other countries will be forced to restructure their internal imbalances so as to eliminate their trade surpluses, or Europe will be forced into playing that role.
More trade with other countries is almost always a good idea, but that was as true ten years ago as it is today, and it won’t protect Europe at all if the Trump administration is ever able to figure out how to reduce its trade deficit.
Pettis accurately describes the reserve currency curse without ever mentioning the phrase.
Neither China nor Germany wants to end their export mercantilism. And if they don’t, there will ne no need for other countries to increase their holdings of yuan or euro reserves.
Importantly, trade deficits and foreign reserves are two sides of the same coin.
Trumpian Irony
Truth Social Link: The idea that the BRICS Countries are trying to move away from the Dollar, while we stand by and watch, is OVER. We are going to require a commitment from these seemingly hostile Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy. They can go find another sucker Nation. There is no chance that BRICS will replace the U.S. Dollar in International Trade, or anywhere else, and any Country that tries should say hello to Tariffs, and goodbye to America!
Trump demands countries maintain US dollar dominance when dollar dominance and trade deficits go hand in hand.
If Trump manages to shrink the trade deficits, foreign-held US dollar reserves will automatically drop.
Trade is Between Individuals, Not Nations
Fundamentally, trade is not between nations. Aggregate reporting of trade deficits such as the persistent US deficit with China, makes it appear otherwise. But the deficit is really a result of a sum of individual transactions.
For example, you or I go to a store and buy a tool at Home Depot. Most likely it’s made in China. The intermediate buyer, say Home Depot, makes big orders with various Chinese manufacturers.
The same applies to a Brazilian farmer buying fertilizer from a Chinese merchant.
To place its order with a Chinese merchant using BRICS, the farmer would need to convert Brazilian Real to BRICS, place an order with a Chinese Manufacture willing to accept BRICS, then the Bank of China would swap Yuan for BRICS and then what?
What precisely does the Bank of China do with all the BRICS it is accumulating?
With the accumulation of US dollars, China buys US treasuries, the most liquid asset on the planet.
In the process, China maintains its export mercantilism, subsidizing its exporters at the expense of Chinese consumers.
What Would it Take for a BRIC-Based Currency to Succeed?
Please consider my August 25, 2023 post What Would it Take for a BRIC-Based Currency to Succeed?
- The Brick would need to float freely. The yuan doesn’t.
- The Brick have to be a genuine reserve currency to achieve widespread use.
- A functioning Brick-based bond market. This requirement is also for widespread use.
- A significant desire by individuals to trade in BRICS and accept BRICS rather than local currencies or the dollar.
- Willingness of China to stop export mercantilism.
- Trust
What exactly does a Brazilian merchant do with BRICS? That merchant needs the Brazilian REAL for local purchases and perhaps the US dollar to buy John Deere tractors.
The dollar is liquid. The BRICS currency? The proposed idea of a BRICS “trading currency” would be even more illiquid. When would it float?
BRICS Are No Threat to US Dollar Dominance, But Trump Is
On July 8, 2025, I commented BRICS Are No Threat to US Dollar Dominance, But Trump Is
I have been mocking BRICS statements since 2011.
Missing in Action
This year, the summit was void of Gold-backed BRICS talk and any discussion of how a BRICS trading currency might work.
Those were the big hype announcements from past summits. They were supposed to have happened by now.
Now, even the talk has vanished.
Trumpian Irony
The irony of Trump’s nonsensical reciprocal tariff policy, enhanced by a direct BRICS threat, is that Trump will be the one to accelerate new trade models, not the BRICS.
Trump’s tariffs will open the door for more Chinese investment in Latin America and more trade between Latin America and China. The same two-way logic applies to Africa.
Meanwhile, Trump’s tariffs will decrease US trade with the rest of the world. China rates to be the biggest beneficiary and the US the biggest loser.
Trump fails to understand that US trade deficits result in increased foreign US dollar and asset holdings. Those US dollar holdings get invested in US treasuries, US equities, and direct foreign capital investment in the US.
US Debt Now Grows by $1 Trillion Every 150 Days
US national debt just topped $37 trillion and is growing fast.
Reserve currencies aside, nothing has been fixed. There are no brakes on US fiscal spending.
Please note US Debt Now Grows by $1 Trillion Every 150 Days
US national debt just topped $37 trillion and is growing fast.
Spending Problem
We have a spending problem not a revenue problem, but what did Trump do about it?
The answer is threaten any Republicans who would not go along with his One Big Beautiful Act that increased the deficits.
The MAGA cult cheered.
And Trump will increase military spending too. It’s sickening.
Gold Hits New Record High
On August 8, 2025 I noted Gold Hits New Record High on Tariffs Then Gives Up “Misinformation” Gains
Tariffs on gold imports don’t matter one bit. Lack of fiscal discipline does.
May 6, 2025 I commented Gold Soars to Another New High, What’s the Message?
Three Messages
- Gold does not believe the Fed is under control
- Gold does not believe Congress is under control
- Gold does not believe Trump is under control
And neither do I.
All this silly babbling about BRICS is a side show.
The short explanation is that no other country wants the reserve currency curse, and none are qualified even if they did.
Meanwhile, US Debt Now Grows by $1 Trillion Every 150 Days. Mathematically, someone must hold every printed dollar!
As a result, Trump gets his wish for US dollar dominance, for now. But what’s that dollar going to be worth on the path we are on?
A currency crisis awaits.
China isn’t buying Treasuries with their $1 billion-per-day trade surpluses with the United States. They’re selling them.
It’s true that there is no BRICS currency, and that there probably will not be. But the bilateral trades between these countries are increasingly outside the dollar. None of them want the risk of having dollar reserves in SWIFT banks, even for overnight to settle trade balances.
There is no evidence of China dumping US treasuries
There is strong evidence China is hiding US treasuries in SOE and in European Accounts with inaccurate disclosure
Something is going on.
In July Switzerland exported 54 tons of gold to the United States, approximately five times more than the previous year. Considering the US market alone, nearly 480 tons were exported from Switzerland in the first six months of the year. By comparison, in the first half of 2024, the figure was “only” 26 tons, while in the second half of that year, demand in the US had already reached 127 tons.
https://www.ticinonews.ch/svizzera/aumentano-anche-a-luglio-le-esportazioni-di-oro-negli-usa-416720
The Fourth Turning. Kondratieff Winter. The Great Reset. The phase of the long term cycle is in control. Bernanke was asked why the FED continued to hold gold. He replied, “tradition.” Tradition has nothing to do with it.
The Federal Reserve does not own any gold. The Fed is custodian for many nations reserves.
The US Treasury is the owner of the U.S’s gold.
The Fourth Turning was a fascinating book. it is quite old but a good read.
EU cannot help as Euro is in fact nothing since CB cannot issue Euro Bonds like the US Treasury Bonds for example. Hence the question of EU ‘s willingness for a Trade Defict does not arise at all.Trump fails to recognize that US’ problems are high Debt and Budget Deficit and a lack of basic Infrastructure especially Power..The irony is :-
1.US needs to import equipment for bringing back manufacturing High Tariffs are harmful for this.
2.Capital is needed.Capital is attracted by low interest rates,low taxes [ High tariffs are indirect taxes on imports]
3.The BRICS are not interested in their own Currency but a desire to Trade in national Currencies eschewing $.
4.The BRICS Currency will be a bit Gold-based also unlike the Fiat $.Hemce it may not have the problems mentioned in the article.
MISH I don’t think you are getting the global currency curse right. As long as you have the global currency during a global trade expansion things are going well. The problem is once global trade shrinks and other currencies become global currency competitors. At that point you start having problems financing your budget deficits, you also have inflation at home as less of your currency is used abroad and a falling currency as less people want to use the dollar.
At that time, just as one century ago for the British pound, that is when the global currency curse hits.
The USA have enjoyed 50 years of freeriding that period may be ending
Name the replacement and the qualifications for a global currency.
There are no replacements – no qualifications – and no one wants the damn thing!
I disagree that it is ending. It is by far the cleanest shirt in the hamper of dirty currencies!
The sky is not falling,
Trump is just playing on peoples fear.
That is what predators do.
Who does he work for?
Two questions:
Do currencies managed in a range together by incestuous central bankers actually “float”?
What is the “curse” of forcing other countries, at the point of a gun or financial siege, to subsidize your lifestyle? If it makes your goods exports less competitive, you can use your MIC as a jobs program and further expand your reach. Eventually, “command and control” becomes your only export. Who says it isn’t good to be the king?
And this was the model before Trump started dragging us back to his Dark Ages viewpoint of factory wage slaves and burning coal at home.
We imported cheap and even subsidized products in exchange for printed dollars that we created out of thin air!! It was the perfect recipe for low inflation accompanied by high debt and a booming standard of living.
All that debt paid interest and created more global wealth! Keep global trade expanding and it is not a problem. Stop global trade with tariffs and a trade war and boom! The shit hits the fan!
Who does Trump work for?
(PS: I am not naive enough to think the growth of debt can go on forever. But with responsible taxation on growing global trade and consumption debt can be responsibly managed. Tariffs are not the answer.)
USA is the only winner here…
In the 2030’s, there will be an extra 1 trillion dollars every 75 days.
In de 2040’s, every 40 days.
Etcetera, there is no limit to how often you can double the amount of your currency.
In China, millions of people work hard to produce goods, earn dollars, have dollars.
In the USA, with one mouse click produces a few trillion dollars, making dollars earned in the past loose their value.
Oh, the curse of getting free goods!
USA has lost the trust especially under Trump.A lonely Nation can only use its Bio-weapons as threat to survive.
The US is not the only winner.
We have been dragging the entire world up in terms of education and the management of resources. The US is leading the way in controlling its population growth and managing our resources.
Sure we have pillaged and exploited other nations and their resources but every one of them wants to be more like us and sells us things at a profit. Think how primitive other societies would be without our economic and cultural influences?
Would you really like to live a substance existence? Foraging all day long just for food and water?
Hell no!
The solution is responsible and sustainable global growth and population control through education instead of economic enslavement.
Pay people a decent wage and reduce the massive corporate profits through responsible taxation.
Wall Street does not need everything!
Anything on inflation??? And about reindustrialization( seems conflicting to currency Reserve status)
There are several structural issued that reduce the likelihood of a “Currency Crisis” in the US:
The first is that the USD is a major high quality reserve holding for most countries Central Banks. It is unlikely that they would undermine the quality of their reserves by attacking the dollar. Not impossible though…
The second is the fact that we own the quoting mechanism for our own currency. There are many ways to intervene and manipulate the dollar higher if there were a sustained attack on the value of the dollar.
A Currency Csrisis is best defined as a selling run on a nations currency that destroys the currencies value and inflation spikes.
Turkey is in one right now and has been since 2017.
USA behaved irresponsibly for Nation having its Currency as the Global Reserve. If what you claim is correct, USA NOW HAS NO PROBLEWMS at all. On the contrary.
This thinking is wrong. China doesn’t need to take on trade deficits to become the reserve currency. All it has to do is become the dominant global lender and switch its lending from USD to CNY.
Want Chinese goods? Sign up for a CNY credit card with low minimum payments and low interest rates. China currently lends its money cheaply back to the US and let’s the US to play middleman to relend it out for a profit. They can skip that and just lend out CNY to finance the purchase their exports. The question is just do they want to accumulate USD ious or CNY ious. Right now they want USD because it still works and they don’t like the risk of change.
Also Michael Pettis is a BSer. Read HanFeZi’s take down of him in Asia Times. Theres more excess capacity in China’s domestic sector than its export sector. Meaning its much harder to make money in the domestic sector. The insane competition in the domestic market has crushed profit margins to the bone leading to broad-based domestic deflation. There is no sense in which the domestic market can eat more capacity. Its not an issue of low income. Its just too much supply and competition. The overcrowded domestic sector is what drives export growth not the other way around. Its the excess domestic competition not subsidies that drive them to export.
The highly productive portion of the Chinese already experience extremely high real incomes. The top 1/3 of the population earn as much as Americans but face 1/3 the price level. You might think transfering wealth from the top 1/3 to the bottom 1/3 would solve this but you would be wrong. Although the poor have more unmet needs, they also have a stronger drive to get rich and increase security. So they save just as much of their income making income transfers moot as a tool to boost consumption. You have to understand that excess capacity is the base state of east asian societies. Its just what happens when ppl evolved biologically to be more risk averse, paranoid and socially competitive. There’s no way to turn them into another version of you. You just have to leverage and live with the fact that you cohabit the planet with another tribe that will always be in excess capacity.
If you think the best way to manage that is a trade embargo then a trade embargo is the best that you can do. There’s no way to use a trade embargo to leverage something else.
China has the same view of trade as Trump
Both want exports
Germany is the same
The US has the disadvantage of the reserve currency curse
Mish what does a US currency crisis look like?
If it happens? How do we recover from it and how long will it take?
Trumps massive debt additions and the rising tariff caused inflation certainly bode well for holding quality gold producers. Companies like AEM and NEM have paid dividends for decades and are relatively safe. AEM has been my long term hold and I actually added a bit yesterday given my sale of big tech.
Trump is the perfect storm for gold and mining companies.
Uncertainty reigns given the insane increase in government spending, disruption of the business cycle and the damage trump is doing to our political relationships/standing/leadership in the world.
Today I learned of the cancellation of Canada Week at a large tourist business in our area because the Canadians simply will not come here and spend their money in a nation that wants to take them over. Way to go Donald! You are costing our local community hundreds of thousands of dollars!
Who is Trump working for?
Putin and his red carpet?
Qatar and their free 747?
Jeffery Epsteins file holders?
;-(
Maybe you could sell your AEM and support your community. That is the charitable thing to do for a rich young white guy like yourself.
Funny! I already do a great deal for my community including employing quite a few people that love their jobs and working for me. “Best boss ever”!
I did get rich by working harder and smarter than anyone else I know. Highly motivated because I grew up poor with a blue collar dad and working mom.
What difference could it possibly make what race I am?
You and your ilk don’t get it. The world operates via cycles. There is an eighty year cycle working its way forward. Trump is the sledgehammer turned wrecking ball who will bring the next 80 year cycle into fruition. Study your history! 2025. 1945. 1865. 1785. Ad infinitum. If you have studied your Latin. Wake up! This is supposed to be the “Age of Aquarius “. We are late ⏰ for this new party. 🎊. Change is coming. Wake up.
Oh I get it alright, and do not want a sick pedophile running things. Have you read “The Fourth Turning”? It supports the cycle theory…
Enjoy!
>> not want a sick pedophile running things
Then we need grassroots political movements to elect the most honest we know, to replace a 99.9% of the scum we have now.
Why don’t you run for president? Since you’re the best boss ever.
In 2025 high vacancy rate isn’t a sign of crash as in 2009/2011. Short term rentals
(Airbnb, Vrbo} and occasional use: 7-8 million vacancies. Other vacant ( repairs, abandoned): 7-8 million. They are the largest contributor, not a glut.
Countries that can’t stop exporting destroy blue collar people and industries in countries that can’t stop importing. Exporters render importers “impotent”. Trump gets it, the globalists don’t
Which came first, the chicken or the egg?
The BRICS aren’t threatening the dollar. The BRICS barter with each other. US consumers are buying from China via Amazon to preempt tariff. When that dead cat bounce will be over the trade deficit with China will rollover, along with other nations. Investors are pouring in trillions to avoid tariffs. They have to buy US dollars to build onshore, or sell stocks, or other liquid assets they own to rotate into real productive stuff.
An economy run by decree won’t work N.K. Ruskis Xi china housing crisis Hungary Iraq an so on and so forth poverty everywhere are we next.?
BRICS nations never planned to launch a gold backed currency. They will trade in their respective currencies and settle the difference if needed in gold. some currencies like yuan may get preference
Agree. IMO better for BRICS to avoid anointing one currency as “reserve”, as it becomes a single point of failure and can be abused by the issuer.
In the last four months the Dow, NDX and SPX made a new all time high, but Gold failed to close above Apr 22 high. Puttas: when DX will rise gold will fall. Since Apr 21 DX is building a cause.
Mish, what do you think about this guys analysis of why Stephan Miran is being fast tracked into the Fed?
https://internationalman.com/articles/trumps-reset-moves-into-high-gear-with-stephen-mirans-fed-nomination/
It seems Miran thinks the US should be ‘paid’ for supplying the global reserve currency to the rest of the world and Trumps policies to date appear to follow thing guys thinking to the letter.
Why did anyone downvote this?? The observation itself is completely non-controversial.
“Trump fails to understand that US trade deficits result in increased foreign US dollar and asset holdings. Those US dollar holdings get invested in US treasuries, US equities, and direct foreign capital investment in the US.”
The US dollar is losing purchasing power fast, probably faster than the interest paid by the US on its debt, possibly not on equity or direct investments. Trump should want foreign nations holding our debt as they lose purchasing power that would otherwise be lost by US citizens, either by holding the debt directly or by covering the fed’s loses if they use QE (money printing and more inflation) to purchase the debt.
“We have a spending problem not a revenue problem, but what did Trump do about it?”
To sum up Mish’s answer, he exacerbated it, but Trump also falsely states the tariff revenue will be used to pay down the national debt. That is not possible as the debt will increase as long as there is deficit spending, it may not increase as fast, but the debt cannot contract as long as there is deficit spend. We can say the debt will be inflated away, but that is not true if we continue to deficit spend. The day of reconning may be pushed back, but as long as there is deficit spending, the debt will be increasing, not going away. The only way to mitigate our fiscal mess is to spend less than our revenue, until then the debt problem only gets worse. If we get the recession many are predicting, then the day of reconning moves forward.
Further, the only way to repair our fiscal mess is to spend less than revenue and use the surplus to pay down the debt. To think we can inflate it away is believing in a gimmick or sleight of hand to avoid making the hard choices and suffering the consequences of incurring the debt in the first place. Debt brings economic activity forward; to compensate, economic activity must contract for a period.
The Trumptanic is taking on a lot of water. How long before she goes to the abyss?
He is certainly making a mess of things. Business can not plan whew to deploy capital because trumps tariffs and other policies are so random. Business does not like uncertainty.
With Trump militarizing our cities, it looks like he is preparing for massive unrest.
Excellent points Mish:
The US benefits greatly from its trade imbalance ~ which exports dollars for goods and creates buyers for our debt. It is not that hard to understand, but Trump does not get it.
Before the tariffs, we imported deflation as other nations competed to sell their goods here, in exchange for dollars. Now they have to sell their goods elsewhere and use other currencies.
In Trumps world, our exports are no longer selling well as Trump has turned sentiment against us and our products. US made items used to be thought of as superior and desirable. Now our goods are a last choice or simply not imported and that is a long term hit to our manufacturers.
Our farmers are being hit particularly hard as crop prices fall and cargoes are being rejected by China.
Russian LNG is flooding the market as the sanctions and tariffs are not effective.
Imagine this:
Hard to believe that Trump is not working for another nation…
>
Canada’s leadership??????? Are you daft??? Two Treadeus and a Carney??? That leadership???? Ha ha
You prefer a dictator and war criminal? Putin? Trump does too…
Do you have TDS type II
No wonder Canada is building pipelines to the west coast to export their oil and LNG to China. The US breaks its treaties under the dictatorship of the nitwit that negotiated and signed them.
Trump is an idiot and pedophile!
<
Please tell me oh wise one how you can arrive at such a sophomoric conclusion that I have tds when I am merely saying that 🇨🇦 Canada has been suffering from powerless leaders oops “leaders “ for decades?
Who do you in your inimitable wisdom do you think is a powerful leader? Go ahead. Name one. Oh wait…. Let me get you started: President Javier of Argentina. Okay. Your turn. Go!
4 remarks:
The thing to note about point 4 is that trade between any 2 countries rarely balances out. So that means that the country that exports more than it imports *must* accumulate dollars. This is a big part of where the global demand for the US dollar comes from.
There is no “must” requirement on foreign countries to accumulate US dollars. As a foreigner I don’t accumulate dollars with excess income, I convert into gold and silver as US toilet paper keeps losing value against real money. And that same behaviour by individuals like me as well as many nations will keep the USD at lower and lower record lows against real money
Yes, there is a must.
Even if you buy gold/silver with US dollars whomever you bought that gold/silver from now holds those dollars.
That’s what Mish’s statement means: Mathematically, someone must hold every printed dollar!
Every dollar that’s ever been loaned into existence or printed etc is held by someone. It’s not possible for everyone to be ‘out of US dollars’
A portion of what I buy is from the US. Now what happens if/when the US runs out of gold and other metals to sell? Default again like FDR and Nixon did? What happens when the USD can’t be used to buy any tangible assets from the US? When that happens and some countries try to offload their US currency reserves there will be a rush by the others to offload in a jammed exit. And that won’t be just foreigners doing that as many US investors will also try to diversify out of the USD.
Probably many US stocks will nominally soar (in USD terms) but dive in real purchasing power and inflation will ruin financially tens of millions of families. And as a foreigner I’ve seen this play out in places I’ve lived.
Countries don’t trade with each other, corporations do, and there is intermediate exchange between a corporation and its central bank at a exchange rate set by the bank or the market.
They could trade in dollars or casino tokens. That’s why the dollar is replaceable if there is political agreement.
Hence my mention of appropriate banking services/intermediation.
Just trying to underscore that from a balance sheet approach, you can transact with notional dollars even without holding them or interfacing with American controlled institutions.
There are several things that have bolstered the U.S. $. There has been a contraction in the E-$ market since the GFC’s negative impact.
The FBO’s E-$ market was drained by the FDIC Chairman, Shelia Bair, on 4/1/2011. That assessment fee, along with Basel III’s LCR, made the alternative borrowing option, fees on foreign deposits, in the E-$ market more expensive for domestic banks.
The countercyclical increase in bank capital, or Basel III’s additional requirements.
A temporary reversal in our trade balance from March 2009 to December 2019.
Interest rate differentials, higher than a lot of our trading partners.
All of this is ending. While the U.S. still has the largest economy, the rest of the world is catching up. Case in point, China has the 4 largest banks in the world.
The NOMINAL US DOLLAR BROAD fell from 2025-01-10 130.0513 to 2025-08-15 120.7606
Sometimes all the market makers get things wrong. The dollar will continue to fall if Powell cuts rates. Powell is not tight.