Exorbitant Privilege No More

Here’s another smoking gun. The US has not posted an annual current account surplus since 1981. During the subsequent 41 years cumulative deficits totaled $15 trillion, culminating in a $1 trillion deficit in 2022 alone.

But this isn’t the free market at work. The massive accumulation of current account deficits depicted in the chart below reflects the Fed’s flood of free money. That is, the dollar liabilities of the US that are being accumulated by the rest of the world, year after year as we consume more than we produce and borrow the balance abroad to fund the difference.

Supposedly this is the “Exorbitant Privilege” of being the world’s reserve currency issuer. But that era is now fading fast owing to Washington’s weaponizing of the dollar-based global payments system to prosecute its hideous proxy war against Russia.

Moreover, “privilege” or not, the purple area of the chart below represents the accumulation of debt to the rest of the world. America has been living chronically and egregiously beyond its means. It is only a matter of time before the due bills come due.

US Balance On Current Account, 1947 to 2022

Owing to the distorting effects of cumulative inflation, it’s more revealing to look at the current account balance as a percent of GDP. Prior to Nixon’s evil deed of severing the dollars anchor to gold in August 1971 the US posted small alternating surpluses and deficits on an annual basis. That’s exactly what is to be expected under a regime of relatively free trade and reasonably sound money.

That is to say, markets adjust, resources get re-allocated, comparative advantage wills out. Under a sound money regime, in fact, there could have been no such thing as 41 consecutive years of large current account deficits. That’s because when money was linked to gold the chronic outflow of “reserve assets” (i.e. gold or gold-convertible paper reserves) that accompanied current account deficits would cause the domestic banking system to contract, interest rates to rise, credit to shrink and excess spending by households, businesses and govenrment alike to be curtailed.