It was August 15, 1940, and Adolf Galland had just watched the Luftwaffe lose 75 aircraft in a single day. German intelligence estimated the RAF was down to its last 300 fighters. The British should have been nearly finished. Instead, RAF squadrons kept showing up in the right place at the right time, in numbers that should not have been possible. Galland, one of Germany’s finest commanders, later noted that the RAF seemed to know just where and when to send their aircraft. He could see the outcomes, but he could not explain them.

Unbeknownst to the Germans, Hugh Dowding had quietly revolutionized air defense. Radar stations along the coast fed data into filter rooms, which fed sector control stations, which scrambled fighters to exactly where they were needed. Air defense had become an integrated information system. The Luftwaffe was fighting the battle with a framework built on Spain, Poland, and France. Yet, Dowding had changed the nature of the battle entirely, and the Germans were reading it with the wrong map.

Gold has undergone a similar paradigm shift, and most investors haven’t fully realized it.^[1] They can see the price action, but they’re still trying to explain it within the old framework. For years, gold could be understood reasonably well through a three-factor model built on real interest rates, volatility, and liquidity. That map no longer works on its own. Gold is increasingly trading not just as a hedge inside the existing monetary order, but as a reserve asset outside it.

This chapter argues that gold’s role is changing because the international system around it is changing. To explain the shift, we need to walk through the full logic of how we got here. We begin with a simple balance of payments identity. We then show how a set of domestic policies in surplus countries systematically suppresses consumption and generates excess savings. Those excess savings create a growing need for reserve assets and force counterpart deficits somewhere else in the system. That, in turn, explains why reserve currency status has become a burden for the US and why the US is now trying to restructure the global trading and capital flow system. From there, we can understand why gold is once again taking on a reserve function, why that changes the way gold trades, and what a future reserve architecture might eventually look like.

Galland kept being surprised because he was still reading the battle through the old framework. The surprises were the signal that the system itself had changed. Gold investors should not make the same mistake.

The Balance of Payments

Most discussions of international trade focus only on goods and services. But that captures only half the picture. When money crosses borders, it does so in one of two ways. It either buys goods and services, which shows up in the current account; or it buys financial assets, which shows up in the capital account. Every net trade flow has a matching net capital flow on the other side. These two flows are inextricably linked through what economists call the balance of payments, which can be expressed in a simple but powerful equation:

Current Account = Capital Account^[2]

A country that imports more than it exports must, by definition, sell claims on itself to foreigners. A country that exports more than it imports must, by definition, accumulate claims on someone else. Put differently, a current account deficit is always matched by a capital account surplus, and a current account surplus is always matched by a capital account deficit.

This may sound abstract, but it has enormous implications. It means that persistent trade imbalances are never just about trade. They are also about where surplus savings are going and which countries are willing, or are forced, to absorb the corresponding net capital inflows.

The balance of payments accounting identity also tells us that any change in one side of the equation must be matched by an equal and opposite change in the other. For example, when a Japanese pension fund or the Bank of Japan uses its trade-earned US dollars to buy USD 1bn in US financial assets, all else equal, US net exports must decrease by USD 1bn and Japanese net exports must increase by USD 1bn, despite this transaction having no direct connection to trade in goods and services.

A century ago, this mattered less because capital flows were much smaller and most international finance was tied directly to trade. Today, capital flows are enormous and global foreign exchange transactions dwarf trade flows by orders of magnitude. When we focus solely on trade flows, we ignore the powerful role that capital flows play in driving trade outcomes. In fact, in today’s global financial system, it’s often capital flows that determine trade flows, rather than the other way around.

Since capital flows can drive trade outcomes, it is essential to understand what generates persistent net capital exports in the first place. Some countries systematically acquire foreign claims year after year, while others are forced to absorb the mirror deficits. This is not a consequence of comparative advantage in the traditional sense. It is the result of domestic policy choices in surplus countries that suppress consumption, subsidize production, and generate excess savings.

The Investment Growth Model and Excess Savings

In the 1960s and 1970s, Japan began running an investment growth model. China adopted a version of it in the 1990s. Germany has run its own variant since the Hartz IV labor reforms of 2003–05. South Korea, Taiwan, and much of emerging Asia have followed similar playbooks.

The investment growth model is a set of policies that transfer income from households to producers. Those policies include currency undervaluation, financial repression, wage suppression, and direct subsidies to producers. Currency undervaluation makes imports expensive and exports cheap. Financial repression keeps interest rates well below growth rates, effectively taxing savers and subsidizing borrowers. Wage suppression holds wages low relative to productivity, reducing household purchasing power while boosting corporate profits. Direct subsidies to strategic industries lower production costs, with the cost ultimately borne by households through taxes or lower transfers.

All of these examples are deliberate policy choices that compress the household share of the economy. High savings rates in countries like China are not primarily the result of cultural thrift or demographic structure. They are the mechanical consequence of policies that suppress the household share of income and raise the producer share.

How Excess Savings Are Created

When household income is suppressed relative to output, consumption falls relative to production. And because savings equals production minus consumption, the gap between the two is excess savings.

Savings = Production – Consumption

Importantly, high savings are not the result of household choice; they are the byproduct of policies that redistribute income away from households and towards producers.

John Hobson identified this underlying dynamic over a century ago. He argued that when income distribution shifts away from consumers and toward producers, demand for consumption goods grows too slowly relative to productive capacity. As a result, the economy generates more savings than consumption can justify.

Countries running investment growth models do not immediately face a savings placement problem because they channel those excess savings into domestic investment, often at extraordinary scale. For a time, that delays the external adjustment. High investment absorbs the excess savings, GDP grows rapidly, and the model appears to validate itself.

But every country that has ever employed an investment growth model runs into the same set of constraints. Investment outpaces profitable opportunities. Capital is misallocated. Bad debt accumulates. And the economy’s ability to productively absorb its own excess savings begins to deteriorate.

At the same time, the model shifts demand away from trading partners. Suppressed consumption and subsidized production make the surplus country’s exports artificially cheap, displacing foreign producers and pulling demand in from the rest of the world. That helps sustain high investment longer than domestic fundamentals alone would allow. But it does not eliminate the underlying imbalance. It only delays the reckoning while spreading the cost.

Eventually, the domestic investment channel saturates. Once that happens, more of the excess savings must spill outward as an external surplus, and the burden of adjustment is pushed onto trading partners.

Why Externalizing the Imbalance Creates a Burden Abroad

If a country systematically suppresses household income and consumption relative to production, the resulting excess output (e.g. savings) must be absorbed somewhere. It can be absorbed domestically through elevated investment, or it can be exported through current account surpluses. When it is exported, the adjustment is shifted onto trading partners.

Not all trade/current account deficits reflect this dynamic. A deficit can reflect healthy intertemporal trade. When capital flows into a savings-constrained economy and finances productive investment, raises future tradable output, and creates a plausible path to reversal, the deficit is the temporary counterpart of development. In that case, the inflow is genuinely beneficial because it expands future productive capacity.

But there is a very different kind of deficit. When a country creates excess savings by redistributing income from households to producers, it can push part of that imbalance onto the rest of the world by exporting those savings. Some other country must then absorb the counterpart deficit and the associated demand shortfall. If those inflows go into an advanced economy where investment is not constrained by scarce domestic saving, they do not automatically generate additional productive investment. In such economies, investment is usually constrained by demand, expected profitability, and risk appetite. The adjustment therefore occurs through lower domestic saving instead – either in the form of weaker output, higher unemployment, higher private debt, larger fiscal deficits, or asset inflation.

The persistent, one-way imbalances of the past four decades are not the result of healthy intertemporal trade with a path to reversal; they are structural surpluses that force the adjustment onto trading partners. In the healthy case, capital inflows finance incremental productive investment and lay the groundwork for future rebalancing. In the burden case, the inflow does not solve a funding problem, but rather creates an adjustment problem.

This was the point John Hobson first identified and Keynes and Joan Robinson extended. Hobson explained how weak consumption in the surplus country creates excess savings that must be absorbed somewhere. Keynes and Robinson added that if the surplus country does not rebalance by raising domestic consumption, the adjustment must occur in the countries forced to absorb the surplus. Robinson called these beggar-thy-neighbor policies because they allow one country to relieve its own demand imbalance by exporting it to others.

The Exorbitant Burden

The US has become the primary absorber of these externalized imbalances because it occupies a unique position in the global system. It combines deep and liquid capital markets, a very large stock of safe financial assets, and an unusually open capital account. Other economies may share some of those features, but not all of them at the same scale. Europe and Japan are surplus economies themselves. China maintains extensive capital controls. Emerging markets are too small, too volatile, or too closed to absorb the world’s excess savings on anything like the required scale. The result is that the US has become the residual destination for the net claims generated by persistent surpluses abroad. That is the real meaning of reserve-currency status.

The US does not run persistent deficits because it is chronically short of savings and needs foreign capital to finance productive investment. It runs them because the rest of the world wants to place excess savings in US dollar assets, and the US has been the country most willing and able to receive them.

In a capital-scarce economy, foreign inflows can finance new productive investment that would not otherwise occur. But the US is not capital scarce. Its investment is generally constrained by demand, profitability, and risk appetite, not by a shortage of domestic saving. As a result, foreign inflows do not automatically create more productive investment. They displace domestic funding and, through the balance of payments, force a corresponding trade deficit that weakens demand for domestic tradable production.

Th is is why the US dollar’s role is better understood as an exorbitant burden than an exorbitant privilege. As Robert Triffin explained in the 1960s, the reserve currency issuer becomes the residual adjuster. When the rest of the world implements domestic policies that systematically generate excess savings and then channels those savings into US dollar assets, the US must run the counterpart external deficit. That means lost domestic demand, pressure on tradable sectors, and adjustment through some combination of higher unemployment, higher household debt, larger fiscal deficits, or asset inflation.

The standard moralizing story gets the causality backwards. Persistent fiscal deficits are a symptom of the adjustment, not the cause of the trade deficit.

Kindleberger made the same argument about the fallacy of blaming the US fiscal deficit for the US current account deficit in the 1980s. In International Capital Movements Kindleberger stated:

Here as in Marshall’s famous general-equilibrium balls in a bowl, the position of each determines the position of all the others, and vice versa…it is a mistake to lay all the blame for the US deficit vis-à-vis Japan on the US government budget deficit.

His point was that the budget can be an outcome of the system’s adjustment when the US accepts large capital inflows.

We can use market prices to help infer the direction of causality. Countries that need to attract foreign capital to fund external deficits experience weak currencies, poor asset returns, and high interest rates needed to entice foreign buyers. That was Latin America in the 1980s, much of Asia in the 1990s, and Tür kiye today.

The US experience could not be more different. US financial assets have been among the world’s best-performing and highest-valued, while the US dollar has remained exceptionally strong despite decades of trade deficits. A currency does not appreciate by 350% over forty years of persistent deficits unless the direction of causality runs from capital flows to trade flows, not the other way around.

End of the US dollar Standard

The US dollar standard could endure only so long as the US believed the benefits of reserve currency status outweighed the costs. For decades, Washington largely treated those benefits as obvious. The US dollar anchored the global financial system, gave the US unmatched geopolitical leverage, and reinforced America’s central position in global finance. In that framework, the domestic burden of absorbing foreign excess savings was either seen as manageable, misunderstood, or treated as the necessary price of supplying the world with a critical public good.

But that bargain was always contingent on the US’s willingness to tolerate the counterpart deficits, the pressure on domestic tradable sectors, and the recurring need to offset foreign demand weakness through some combination of private sector debt expansion or fiscal deficits. Once the burden grew large enough, or became clearly visible enough, the logic of the system changed. What had long been described as an exorbitant privilege began to look more like an exorbitant burden.

That shift is now well underway. It’s not that the costs suddenly appeared. It’s that a growing part of the US policy establishment no longer sees the US dollar system primarily as a source of privilege, but as an underpriced global public good that others have used while pushing the adjustment burden onto the US.

In Stephen Miran’s first major public speech as Chair of the Council of Economic Advisers, he framed the US dollar standard and the US security umbrella as global public goods the US has been providing to the rest of the world. In his telling, the US keeps its markets open and allows other countries to externalize their domestic imbalances by accumulating US financial assets, while surplus countries free-ride on both the security umbrella and the US dollar system. According to Miran, domestic politics in surplus countries make it difficult to shift away from export-led growth toward stronger domestic demand. It is easier to keep running surpluses, accumulating US dollar claims, and letting the US absorb the demand shortfall.

Miran’s conclusion was that if voluntary cooperation does not produce real burden sharing, the country providing those public goods will begin using the instruments it actually controls to enforce it. He points to tariffs, procurement terms, investment conditions, and user fees on official US dollar holdings. In this framework, surplus countries can share the burden by opening their markets wider to US exports; buying more US goods and services; shifting foreign direct investment into US industry; and, in the line most observers glossed over, by “simply writ[ing] checks to Treasury that help us finance global public goods.”

If you have read Miran’s earlier User’s Guide to Restructuring the Global Trading System, it is clear what he has in mind. There he sketches a specific instrument: a user fee on foreign official holders of US Treasury securities, implemented by withholding part of the interest paid on those holdings.

The logic behind a capital flow tax is that every US trade deficit is matched by a capital-account surplus. All US dollars spent abroad must return either to purchase US goods and services or to purchase US financial assets. For decades those US dollars have returned overwhelmingly through the second channel. Foreign central banks and sovereign funds have not been consuming US output; they have been accumulating claims on future US production. A withholding tax or similar capital flow tool would tilt that choice by making US financial assets somewhat less attractive relative to actual purchases of US output and investment in US capacity.

Seen in that context, “write checks to Treasury” is best understood as the diplomatic version of the concrete capital account tool Miran previously discussed. So far the administration has moved in that direction through tariffs, burden-sharing demands, and investment pressure; but it has not yet imposed a user fee on foreign Treasury holdings or directly taxed foreign holdings of US financial assets. Those more explicit capital-flow measures remain unused. But the logic of the strategy points clearly in that direction. The administration’s push on stablecoins, and the passage of the GENIUS Act, tell us that the Trump administration is headed in that direction.

A great deal of confusion in these debates comes from treating the US dollar’s international currency role and its reserve currency role as though they were the same thing. They are not. The international currency role is the plumbing of global trade and finance: invoicing, payments, settlement, and collateral. The reserve currency role is about the asset in which countries accumulate net claims when they run persistent surpluses and export savings on a net basis.

That’s an important distinction because the burden on the US comes from the reserve currency role. Surplus-country policies suppress domestic demand relative to production, forcing those countries to export savings. Those net savings then become net claims on the US, which means the US must run the corresponding current account deficit. The problem is not that trade is invoiced in US dollars. It’s that the system uses US dollar assets to absorb and store persistent global imbalances.

The best analogy is the gold standard. What mattered was not that everyone used gold in ordinary day-to-day transactions. What mattered was that gold settled net positions between countries. Deficit countries lost gold, while surplus countries accumulated it. Gold was the reserve asset because it was the instrument through which persistent imbalances were ultimately settled.

Stablecoins should be understood as an attempt to separate the US dollar’s international currency role from its reserve currency role. The GENIUS Act created a federal framework for payment stablecoins backed one-for-one by specified liquid assets, including US dollars and short-term Treasuries. On its face, that is a push to strengthen the US dollar’s role in the transactional plumbing of the global system. But if Washington intends to increase the friction on foreign reserve hoarding, whether through user fees or other capital-account tools, then it needs some way to preserve the US dollar’s global payments role without continuing to subsidize the unlimited accumulation of net claims on US financial assets. Sta blecoins help unbundle those functions. They allow global users to keep transacting in US dollars even as the US becomes less willing to absorb the world’s excess savings in Treasury form without consequence. Stablecoins are the infrastructure you build before you pull the capital-controls lever.

Why Washington Has Not Yet Moved Directly Against Capital Flows

If the administration ultimately intends to go after foreign reserve hoarding more directly, the obvious question is why it has not done so already.

The first reason is sequencing. Before you can put a tax on foreign US dollar holdings, you need the stablecoin infrastructure to avoid blowing up the US dollar payments system. It is the plumbing that has to be in place before the reserve side of the system can be repriced more aggressively.

The second reason is the Federal Reserve. Capital flow tools are much riskier without the cooperation of the Federal Reserve. Miran says as much in his User’s Guide, writing that this agenda “requires cooperation from the Fed”; and he notes that such cooperation is not unusual, as the Fed has long deferred to Treasury on currency policy, and “the details can be worked out through agreements between the two”. What has likely been missing so far is confidence that Powell would provide that backstop to prevent any disorderly spike in the term premium. That is why the 2026 Fed transition sits in the background of all this. Powell’s chair term ended a few days ago in May 2026, and Kevin Warsh took over.

After Warsh’s nomination, Stanley Druckenmiller gave an interview saying he was “really excited about the partnership between him and Bessent” and that “having an accord between the Treasury secretary and Fed chair is ideal.” Given that both Warsh and Bessent previously worked for Druckenmiller, the comment is hard to dismiss as casual. It may not be a coincidence that, immediately after Warsh’s nomination, Druckenmiller chose to publicly emphasize the importance of a Treasury-Fed accord.

The Supreme Court’s February 2026 tariff ruling also increases the likelihood of the administration implementing capital flow tools. By holding that the International Emergency Economic Powers Act (IEEP A) did not clearly authorize tariffs, the Court narrowed one of the administration’s most flexible trade levers. That makes the capital account tools even more important to reverse the US trade deficit, especially since that represents the source of the underlying imbalance.

Where Will Excess Savings Go?

The US is no longer willing to absorb the world’s excess savings on the old terms. But the excess savings do not disappear. Countries are still running investment growth models that suppress domestic consumption relative to production, so some country must still absorb the counterpart demand shortfall, and some asset must still store the resulting claims.

One possibility is for surplus countries to reduce the excess savings at the source by reversing the growth model itself. That would mean raising household income, increasing consumption relative to production, and giving up part of the industrial competitiveness those policies were designed to create. It is the correct long-run answer, but politically the least likely.

A second possibility is to keep absorbing the excess savings at home through domestic investment. But those economies have already pushed investment beyond what domestic demand can profitably support. More investment would only deepen the debt, overcapacity, and capital misallocation problems already visible in places like China.

A third possibility is to find another country willing to run the counterpart deficits and absorb the rest of the world’s excess savings. But this quickly runs into political reality. No major economy wants to become the new residual adjuster, because doing so would mean tolerating a stronger currency, a weaker tradable sector, and persistent external deficits. Europe won’t do it. European politicians may occasionally speak as if reserve currency status is an opportunity, but a world in which Europe absorbs Asian excess savings would also be a world of a much stronger euro, weaker external competitiveness, and persistent trade deficits. That is the opposite of the strategy Europe, and Germany in particular, has pursued for years. Japan won’t do it, either. Japan has spent decades resisting foreign capital inflows and preserving its position as a net capital exporter. China is even less plausible. China will not accept running the required trade deficits, which would undermine its domestic competitiveness and intensify its overcapacity and debt problems. Emerging markets are too small, too volatile, and too institutionally fragile. In practice, there is no obvious replacement for the US as the global absorber.

That leaves the asset problem. Even if no country is willing to absorb the demand shortfall on the old scale, the excess savings still have to be held in some form. Until recently, the default answer was US dollar assets, above all Treasuries, but also agency debt, corporate bonds, and equities. That option is not disappearing overnight, but it is no longer frictionless. Tariffs, capital-flow threats, withholding-tax proposals, and the broader signaling from the Trump administration all point in the same direction: US assets are no longer just a neutral parking place for surplus savings. They increasingly carry political risk, potential tax risk, and, after the freezing of Russian central bank reserves in 2022, obvious sanctions risk.

If no country wants to absorb the deficits and US assets are becoming politically encumbered, that leaves gold as the obvious reserve asset alternative. Gold does not solve the underlying global demand imbalance. And it doesn’t make surplus countries consume more, nor does it create a new residual absorber, but it solves the reserve-asset problem. Gold has no counterparty risk. There is no foreign government on the other side of the claim that can freeze it, sanction it, tax it, or charge user fees for the privilege of holding it. It can’t be weaponized in the way US dollar reserves were weaponized against Russia, and it doesn’t depend on the policy choices of the country issuing the liabilities.

Central banks already understand this. Since the freezing of Russian reserves, official gold purchases have accelerated sharply. But the reason is bigger than simple sanctions hedging. The world’s major surplus economies are still generating enormous volumes of excess savings. The gold market is tiny relative to the Treasury market. That means even a partial redirection of structural reserve demand away from Treasuries and toward gold can have an outsized effect on the price of gold.

That is why gold has increasingly decoupled from the old macro models that tied it tightly to real rates, liquidity, or the next FOMC meeting. Those factors drove gold when the global trading system revolved around the US freely accepting its role as the residual absorber. That forty-year arrangement is now being renegotiated, and gold is absorbing what the US dollar no longer will.

If the Trump administration moves from indirect signaling to direct capital flow measures, the message that Treasuries are no longer a neutral parking place for excess savings becomes explicit. At that point, the incentive to move into gold should intensify. The more explicitly the US threatens to reprice or restrict foreign reserve hoarding, the stronger the rush into gold will become.

Gold in the New Regime

This structural shift is enormously bullish for gold over the long run. But it also changes how gold trades.

In the previous regime, the main drivers of gold were real interest rates, volatility, and liquidity. Gold would benefit when real yields fell, when macro volatility rose, or when investors began to worry about monetary instability. Those traditional factors still matter today, and they can still be supportive. But they are no longer sufficient to understand gold on their own.

After the freezing of Russian reserves in 2022, gold increasingly began to trade as the neutral reserve asset in a system where the old reserve asset had become politically conditional. Once US dollar reserves could be frozen, or otherwise made contingent on geopolitics, the market had to reprice the one major reserve asset without counterparty risk. That was the moment gold stopped being just a hedge inside the system and started becoming the neutral reserve asset outside it.