How often have you seen a comment like this in articles about the U.S. dollar? “Analysts say that what really worries them is that foreigners will start moving out of the dollar.”
Next time you see something like that, dismiss it. The fact is that foreigners – as a whole – cannot ditch their dollars.
Indeed, because our trade deficit is constantly putting new dollars into the hands of foreigners, they have to just as constantly increase their U.S. investments.
It’s true, of course, that the rest of the world can choose which U.S. assets to hold. They can decide, for example, to sell U.S. bonds to buy U.S. stocks. Or they can make a move into real estate, as the Japanese did in the 1980s.
Moreover, any of those moves, particularly if they are carried out by anxious sellers or buyers, can influence the price of the dollar.
But imagine that the Japanese both want to get out of their U.S. real estate and entirely away from dollar assets.
They can’t accomplish that by selling their real estate to Americans, because they will get paid in dollars. And if they sell their real estate to non-Americans – say, the French, for euros – the property will remain in the hands of foreigners. With either kind of sale, the dollar assets held by the rest of the world will not (except for any concurrent shift in the price of the dollar) have changed.
The bottom line is that other nations simply can’t disinvest in the U.S. unless they, as a universe, buy more goods and services from us than we buy from them. That state of affairs would be called an American trade surplus, and we don’t have one.
You can dream up some radical plots for changing the situation. For example, the rest of the world could send the U.S. massive foreign aid that would serve to offset our trade deficit. But under any realistic view of things, our huge trade deficit guarantees that the rest of the world must not only hold the American assets it owns but consistently
add to them. And that’s why, of course, our national net worth is gradually shifting away from our shores.
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