“America was able to run a balance-of-payments deficit “without tears.”
–Barry Eichengreen
April 28, 2025 — This is a primer. The boiled bone. A field note from the edge of the dollar system. The long paper lands this weekend, but here lies the structure. The terms. The myth stripped bare. Trade deficits are not indulgence. They are sacrifice. Pegs are not anchors. They are triggers. What was once privilege is now a cost center for global imbalance. I have lit the fuse. The match drops this weekend…
For decades, the global financial system has stood on a foundation both admired and resented: the US dollar. Once hailed as a badge of sovereign privilege, it afforded America the luxury of deficits and the warm embrace of the world’s surplus economies. But what masqueraded as dominance concealed a deeper contract, one of service.
To be the world’s reserve currency is to underwrite global liquidity, to issue pristine collateral for others to hoard, to run deficits others refuse to shoulder, and to act as the final buyer, borrower, and insurer. The privilege became obligation. The advantage, cost.
This is the contradiction now made plain. The Trump administration is the first to speak of it not as empire’s indulgence, but as structural contribution to a parasitic order, a system in which creditors deny reform, surplus nations scorn reciprocity, and liquidity becomes tribute rather than trade.
As automation and energy reshape the world’s logic, advantage is no longer found in labor’s cost, but in machinery, proximity, and command. The moment is decisive. Infrastructure will be poured, habits of flow entrenched. If the United States delays, it loses more than production, it forfeits sovereignty over time and the right to script the future.
We must move now. Before politics dilutes urgency, before rivals pour silicon cathedrals with our capital, before the supply chains of tomorrow calcify beyond our grasp. The cost of inaction is finality. The future waits for no one.
The Dollar as Public Good
The dollar is no longer mere currency. It is infrastructure. A global commons. Nations transact, store wealth, and anchor prices in this monetary park. Entry is open, usage unbounded. Yet the upkeep is not. Someone must police the margins. Someone must absorb imbalances. That someone has always been the United States.
But the costs are misunderstood. America’s deficits, vilified as indulgent, are in truth the grease of global trade. The nation that bleeds red ink finances the world. It is a sacrifice masked as failure. Meanwhile, nations like China and Germany export with virtue but hide the vice, suppressed wages, hoarded surpluses, weaponized imbalances.
These mercantilist economies buy Treasuries not out of respect but for leverage. They recycle their surpluses into American liabilities, distorting global capital flows and muting market signals. They manipulate the intelligence of money itself, directing capital not to its best use, but to its safest harbor. They profit from imbalance, not innovation.
The Strong Man’s Bargain
America was never conquered, but it was shackled by its own system. It opened its gates, built the safest assets, and became the deficit engine for the world. The result, global capital surged into its markets not as tribute, but as exploitation. America became both host and hostage.
Surplus nations needed a laundromat for their excess. The United States, by running deficits, fulfilled the role. But the costs crept in. Asset bubbles, inequality, the dilution of productive finance. The strong man was bound not by war, but by agreement, a voluntary captivity.
From QE2 to Tariffs: Retaliation and Realignment
The Global Financial Crisis marked the rupture. When China’s vast holdings of US Agencies teetered, panic surged in Beijing. QE2 was America’s response, not just stimulus, but strategic strike. It crushed real rates, drained foreign rentier returns, and signaled the end of passive tolerance.
It was the first sign of sovereign retribution, designed to starve the parasitic game, to redirect liquidity back to Main Street, and to disrupt the synthetic equilibrium of a distorted world order. The world’s free ride on American solvency had ended. The Fed would no longer subsidize those who refused to carry risk.
Synthetic Systems and Strategic Pivot
China adapted. The Belt and Road Initiative became a shadow reserve strategy, a synthetic architecture to replicate the rent once found in Treasuries. Dollars were recycled through offshore loans, not central banks. Influence was repackaged as collateral. The US, in turn, faced greater sovereign issuance pressure.
But America saw through the fog. Deficits were not wasteful, they were scaffolding. They held up a global system that others gamed. The new American doctrine emerged, mutual burden-sharing. If others want the liquidity, they must help mow the grass.
The Great Unwinding
Now the facade crumbles. China is pulling back. No longer the silent backstop of the dollar system, it turns inward, collapsing its own domestic rentier government bond market to redirect savings toward domestic equity and housing. It is not generosity. It is necessity. The global Ponzi is ending.
Japan faces similar reckoning. Its long-standing role as yen-dollar liquidity provider is questioned. The credibility of JGBs as collateral erodes. Counterparties want dollars, not promises. And the yen is tantalizing. A wave three collapse looms. Policy normalization is a mirage. The genie is out. They’ll never hike rates.
Without Chinese and Japanese capital flooding into Treasuries, the US financial system reverts to first principles. The Fed must choose, protect equity or safeguard the sovereign bond. The latter will win. Not for ideology, but because duration is destiny.
From Privilege to Precipice
Investors still cling to the idea of the Fed put. But that era may be over. In its place, a reality far harsher, austerity, fiscal restraint, and sovereign recalibration. A world where US Treasuries rise, not as sanctuary, but as the last definition of a safe asset.
The irony, the market may hate Treasuries at their moment of greatest promise. But those who grasp duration, who understand the reflexivity of collapse, will ride the slingshot of convexity back to fortune.
The Currency Wars of Tomorrow
As the yuan weakens, not to grow but to survive, the world must heed a warning. Devaluation of an already undervalued currency is not stimulus. It is deflationary aggression. The cabbage cannot be squeezed further. The gains do not materialize. The rest of the world absorbs the shock.
Devaluation works when correcting overvaluation. Not when weaponized from a floor. Not when global demand is muted and domestic households shrink from higher import costs. It is a global tragedy disguised as strategy.
The currency peg is no longer a stabilizer; it is the fuse. In 1935, US silver purchases triggered a credit collapse in China. Today, QE via Treasuries, inflated a boom, bust and similar credit collapse in Chinese real-estate. As US tariffs rise and global demand weakens, China faces a trap. Selling Treasuries would repatriate yuan and destroy its export sector, while holding them preserves a failing model. The renminbi peg, once strategic, now threatens collapse. The question is not whether the system adjusts, but whether the currency survives the reckoning.
The Endgame
AI, like automation, is the next gladiator. But even the market titans will not save us if capital misallocates. Capex in a saturated race yields bubbles, not breakthroughs. Inflation becomes impoverishment. Wages lag. Consumption contracts. The system groans.
And so we arrive at the precipice. The year ahead teeters between euphoria and catastrophe. A new 1990s or a new 1930s. The Fed can still pull levers, but the rules have changed. The structure is brittle. The old myths are gone.
This is the twilight of exorbitant privilege.
What comes next is not retreat, but renegotiation.
The dollar remains. But now, as a contract.
The park opens in five minutes…
Regards,
Hugh Hendry
The ACID Capitalist
P.S. from Addison: The fate of the dollar will be no different than the fate of the last reserve currency, the British pound. It will still exist. It will still be used to pay for goods, services, and parasitic taxes. But it will be replaced with something else.
That something else could include gold again, restoring the metal back to an official monetary position it’s held for thousands of years – making the last 50 or so years nothing more than an historical aberration.
It could be a combination of gold and something else, perhaps bitcoin. It’s likely that digital assets, particularly bitcoin, will be woven into the fabric of the global monetary system, as we’ll discuss later this week with Grey Swan Investment Fraternity contributor Mark Jeftovic – best known for The Bitcoin Capitalist and Crypto Hedge Report.
Please add your own perspective to the mix here: addison@greyswanfraternity.com
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