The International Monetary Fund’s 2026 External Sector Report found something that should unsettle the standard story about global imbalances: they are now near 150-year highs. The Fund traces global imbalances back to domestic saving-investment gaps – weak Chinese investment and an over-spending US – rather than to trade policy. Bank of England researchers examining the same data note that a significant share of these ‘excess’ imbalances remain unexplained by the standard framework, with excess surpluses becoming strikingly more persistent than economic theory would predict.
Something structural is missing from the models. The role of the US banking system. The dollar’s share of official reserves has drifted to a little above 50% from over 70% in 1999, and most commentary – especially in the imbalances debate – treats the US external position as a matter of prestige or policy choice: too much fiscal spending, too little private saving, the ‘exorbitant privilege’ of cheap borrowing and geopolitical leverage. This framing misses the mechanism that connects reserve status to the current-account deficit the IMF is worried about.
What reserve status actually buys the US
American commercial banks, far more than the Federal Reserve, create the money that finances US domestic demand. Bank loans create deposits before any prior saving exists to back them. In fact, every modern banking system works this way, but what sets the US apart is what happens next. In any ordinary economy, new spending that pulls in imports eventually hits a financing constraint: reserves drain, the currency weakens, borrowing costs rise and credit growth slows, whether the central bank likes it or not.
Britain, the issuer of the world’s reserve currency until well into the 20th century, has lived this more than once since losing that status: the 1976 IMF bailout, the market’s swift verdict on the 2022 mini-Budget. Nearly half a century and very different governments separate those episodes, yet the lesson is the same: without a deep, structural buyer of last resort for its liabilities, an economy’s credit-driven import demand meets its ceiling quickly, and once sterling’s shield was gone, UK bank credit conditions loosened markedly, running both higher and more volatile than in the fixed-exchange-rate decades before it.
The US has largely escaped that ceiling, which is exactly why its ‘domestic distortion’ looks so different from China’s. Dollars that leak out through the current account do not disappear; they come back as central bank reserves, as purchases of Treasury and agency debt, as deposits in the very banks that created them in the first place. That willingness of the rest of the world to hold and recycle dollars is what lets US bank credit – and the net import demand it fuels – run further and longer than any other banking system could manage. This is not theoretical: panel data across four decades shows that each dollar of reserves accumulated abroad lowers the US current account by more than a dollar, with the mirror effect showing up as a larger current account in the reserve-accumulating countries themselves.
What the textbook dilemma gets backwards
Robert Triffin’s mid-century dilemma held that the reserve issuer is bound to run deficits simply to keep the world supplied with dollars: liquidity for everyone else, instability for the issuer. It explains the Bretton Woods breakdown well, but it doesn’t explain how the dollar system works now that convertibility to gold is gone. What the recycling loop shows is that the deficit is licensed by the world, not owed to it. The constraint doesn’t come from having to supply dollars; it comes from whether the world keeps choosing to send them back.
This changes the current policy argument. China’s current account surplus widened by $300bn last year, the largest jump since at least 2000, while the US deficit, though it narrowed, remained the world’s largest at about 0.9% of global gross domestic product. The IMF reads this as two separate domestic distortions needing two separate domestic fixes: Chinese fiscal expansion and US fiscal tightening. But the two are not separate stories. US ‘over-consumption’ is sustainable in the first place because the same surplus economies the IMF blames for excess saving do keep on holding dollars, allowing US banks to keep running the printing press and finance import demand, without hitting the ceiling all other countries hit. Fix only the fiscal numbers and leave the recycling loop untouched and the imbalance won’t shrink the way the IMF’s models predict.
Seen this way, reserve diversification and the deficit are the same story. If central banks and investors gradually hold fewer dollars, even without the dollar losing its status as the dominant reserve currency, the recycling channel that currently absorbs the US’s external deficit narrows. The constraint that for so long has been suspended for the US banking system starts, slowly, to bind again.
In the end, it wouldn’t be a dramatic currency collapse, but something quieter and smoother. A tighter link between domestic credit creation and the external account, similar to the discipline that governs credit cycles in London, Frankfurt or Tokyo. Bank lending standards would start responding to the external position in a way they currently do not and a widening deficit would show up faster in funding costs than it does today. The dollar would not need to be dethroned for this to happen. It would only take for the recycling to become less automatic than it has been for decades.
The real policy question
Policy-makers and investors keep asking whether the dollar will get replaced. It will not be replaced, not any time soon and not by any single rival currency. The real question is how much of the US current external deficit exists because the country’s banking system has been let off a constraint every other banking system faces. The current debate keeps looking at savings gaps, tariffs and reserve-currency prestige. It should be looking at bank credit creation and reserve recycling instead.
This reframing changes what a fix should look like. The IMF’s proposals still treat the deficit and the surplus as separate national distortions, each correctable by its own government: Chinese fiscal expansion on one side, US fiscal tightening on the other. But the mechanism that actually sustains the imbalance has its own two halves and they cut across that national ledger rather than sitting on it: US banks create the credit, foreign central banks do the recycling, and the second half is not simply reacting to the first. Fixing the fiscal numbers on both sides would leave this connecting mechanism untouched.
A coordination framework that asks only the fiscal side to adjust is solving half the problem, and until bank credit creation and reserve recycling are treated as integral parts of the same mechanism, the world’s largest current account deficit will keep being diagnosed as a fiscal problem. It has never been only that.
Biagio Bossone is an adviser to international financial institutions and national central banks.
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