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.
