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Foreign savers fund US deficits
Savers and spenders
A country that consumes and invests more than it saves has to get that capital from somewhere, and it comes from net saver nations. The US runs persistent federal budget deficits and issues debt to fund its spending. That debt, in the form of Treasuries, attracts capital from net savers like Canada, Germany, and Japan.
Why Treasuries
Treasuries are considered the world's most risk-free asset, and for now there is no shortage of foreign savers looking to put excess cash to work. The US economy and stock market are also the favored investment destination of the world, so savings keep flowing into US bonds and equities.
What the inflow does
That inflow helps drive investment into productive assets in the US. It also pushes interest rates down, which in turn drives up asset valuations.
Why are Treasuries seen as risk-free?
The US government borrows in dollars, a currency it issues itself, and it can raise revenue through taxes. Its bond market is the deepest in the world, so investors can buy and sell large amounts quickly. The label is relative rather than absolute: Standard and Poor's cut the US credit rating from AAA to AA+ in August 2011, and Fitch did the same in August 2023.
Why does the dollar's reserve role require deficits?
Economist Robert Triffin argued in 1960 that a country issuing the world's reserve currency must supply it to everyone else by running external deficits. Those deficits add to the claims on that country over time, which can erode confidence in the currency. This tension is now called the Triffin dilemma. Foreign central banks hold dollars largely in the form of Treasury securities.
Why do Germany and Japan save so much?
Both countries have aging populations, which pushes households to save for retirement, and both have large export industries. Japan's surplus comes largely from income on its overseas investments. Germany's current account surplus exceeded 7 percent of GDP in several years in the late 2010s, according to the IMF.