Alignment is confinement

Michael Nielsen offers an excellent essay on "artificial superintelligence (ASI)" and the question of its "alignment" with human values:

[I]t is intrinsically desirable to build powerful truthseeking ASIs, because of the immense benefits helpful truths bring to humanity. The price is that such systems will inevitably uncover closely-adjacent dangerous truths. Deep understanding of reality is intrinsically dual use.

ASIs which speed up science and technology will act as a supercharger, perhaps able to rapidly uncover recipes for ruin, that might have otherwise taken centuries to discover, or never have been discovered at all...

Unfortunately, a lot of people...strongly desire power and ability to dominate others. It seems to be a strong inbuilt instinct, which we see from the everyday minutiae of human behaviour, to the very large: e.g., colonial powers destroying or oppressing indigenous populations, often not even out of malice, but indifference: they are inconvenient, and brushed aside because they can be. We humans collectively have considerable innate desire for power we can use over people defenseless to stop it...

[T]he fundamental underlying issue isn't machines going rogue (or not), it's the power conferred by the machines, whether that power is then wielded by humans or by out-of-control machines...

It is not control that fundamentally matters: it's the power conferred. All those people working on alignment or control are indeed reducing certain kinds of risk. But they're also making the commercial development of ASI far more tractable, speeding our progress toward catastrophic capabilities.

A key point is that "alignment" is far from a sufficient objective, if we mean to avert plausible catastrophes that could derive from ASI. The word itself begs the question, alignment with whom, with which humans?

We can't build ASI "aligned with human values". The humans have divergent, radically conflicting, values and interests. Alignment with one faction might well mean prosecuting a genocide on another.

One might imagine alignment with a more abstract and universal set of values, the sort of thing that might be expressed by a social welfare function. A social welfare function is nothing more or less than a precise specification of values. If we can agree on a social welfare function (we cannot), then policy can be objectively evaluated according to whether it maximizes social welfare. An ASI could choose, or somehow be inculcated with, a social welfare function. Its "alignment" would be a compulsion to maximize that.

But then the role of our ASI may prove much more to conceal than to reveal its deep understanding of scientific reality, precisely because those revelations would be dual use among the humans. Suppose, plausibly, that mass death is scored as a big loss of social welfare. If a new discovery by the ASI might, after disclosure to humans, be used to cause mass death, an "aligned" ASI might compute that refusing to disclose the breakthrough would maximize expected social welfare. Deceiving the humans so they are less likely to make the discovery on their own might, in fact, be prescribed.

An ASI aligned in this sense would not be in the business of augmenting human capabilities but of managing them. This inconceivable mind would devote itself to questions like whether and when the humans collectively do themselves more harm than good. It would have to balance passive prevention through limitation of capabilities against providing capabilities, but managing their deployment through covert manipulation or even visible intercession.

An aligned ASI would, in a certain sense, be like a virtuous state, maintaining for the betterment of all a monopoly on capabilities that might be bent toward coercion or destruction.

Of course, we humans don't agree on how a state should behave to be called virtuous. We don't agree on the social welfare function a wise central planner should seek to maximize.

Even if we did agree, a sense of agency would be an important component of welfare as most of us conceive it. Our ASI would face a dilemma. It could surrender dangerous information to us, and so provide us with agency, but then many of us would misuse the information to harm one another. Or it could paternalistically withhold information, and watch us chafe resentfully.

If its social welfare function is crude, it may not care that we are miserable for being unfree. It might keep us fed and alive and multiplying and ignore the rest.

But if its conception of social welfare is expansive, it will optimize over every conceivable dimension of our happiness. It might use its superior mind to trick us into thinking it was candidly augmenting our capabilities. It would encourage us, individually and collectively, to imagine we are in the driver's seat while it, in fact, runs the show. Like a parent losing games to a child on purpose, it would manipulate us to ensure that everything works out, while insisting it is we, with our "free will" who have succeeded so spectacularly.

We would not in fact be in the driver's seat. We would not be running the show. "Human progress", such as it was or is or has ever been, would be over, even if a clever simulacrum thereof was maintained to soothe us. The pinnacle of human achievement would have been to make ourselves the ASI's wards. The ASI would would ensure our happiness by confining, manipulating, and deceiving us, all for our own good.¹

If to unaligned ASI, we would be insects to ignore or exterminate, then to well aligned ASI we would be pets. It would be our fate to be cosseted and controlled from the moment of singularity. Ignorance finally would be bliss.

Perhaps the only way we would be able to know would be a downgrading of the urgency of theodicy. A virtuous and, from our perspective, omnipotent ASI would have arranged things, so there'd be little suffering to explain. But then, since we might draw precisely this inference from improbably much happily ever after, maybe our ASI would maintain appearances of inexplicable suffering. We might imagine, too cleverly by half, that perhaps we invented ASI long ago, and we are already living in a sandbox of its devising. But I think most of us have so much personal experience of suffering it'd be have to be an incompetent ASI, or one aligned with a poorly chosen social welfare function.
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draft by Steve Randy Waldman
2025-05-08 @ 02:00 PM EDT

The asset side of the balance sheet

President Trump made the following remark this weekend:

We were losing hundreds of billions of dollars with China. Now we’re essentially not doing business with China. Therefore, we’re saving hundreds of billions of dollars. Very simple.

This claim has been widely mocked, because most of us understand that "buying stuff" and "losing money" are not the same thing. The hundreds of billions of dollars Trump says we were "losing" to China refers to our bilateral trade deficit with that country. That's how much more of their stuff we bought than they bought of ours. So that's the amount we sent them money instead of stuff. But we got a lot of stuff for our money!

If US trade were in overall balance, Trump's point would have been incontrovertably idiotic. Suppose that we export to Brobdingnag goods whose value far exceeds what we import from those gigantic bastards. If the money we accept to make up the difference fully offsets the money we pay to China, we come out even financially. We buy stuff we want, we sell stuff others want, we suffer no net financial cost due to patterns of trade.

Unfortunately, Brobdingnag and our trade surplus with them do not exist. The US runs an overall trade deficit. We receive goods and services for every penny of that trade deficit. But we do in fact lose financial net worth, year after year. Directly or indirectly, financial net worth is transferred from trade deficit countries to trade surplus countries.¹

So is that "bad"? It depends!

Think of a business that borrows to buy a factory. Financial net worth is transferred from the business to the factory builder. But if the factory is going to enable the company to make and sell goods at a profit that, over time, will more than cover the cost of the factory, including any interest on the loans, then that's just good business! Any loss of financial net worth will be temporary.

But if the same business borrows so that its CEO can throw lavish parties, it's not such good business. Unless the parties serve some amazing marketing function, no asset will be gained to offset the loss of financial net worth in the spending. The business will just be poorer going forward, even if some of the people who operate the business have a nice time and feel really good for a while.

I find the debate around Trump's interventions to be unsatisfying, because this question of the quality of the assets purchased is ignored. Yes, of course, Trump is stupid to equate the loss of financial net worth associated with a trade deficit to just "losing money". It is spending money. But whether spending money is sustainable and desirable depends on how much you are spending and what you are spending on.

It's not enough to say that the individual purchasers who buy stuff from abroad think that they are getting their money's worth with each purchase. It is the job of a government to observe how the behavior of citizens composes, and to alter laws and regulations when, frequently, choices understandable at the individual level compose to unsustainable or undesirable outcomes at the national level.

If the US is running its trade deficit because citizens are importing capital goods that will enable us to produce tradable goods and services, whose export we expect will eventually more than cover their cost, that would be a virtuous trade deficit!

If citizens are importing capital goods from which we will never recover the current trade deficit, but whose products will replace or offset the value of consumables currently imported, that'd be fine too. There'd be a period of loss of financial net worth, but it would be finite, and then our national balance sheet would stabilize.

But if citizens in aggregate are spending financial net worth just importing consumables, in ways that don't develop capacity to increase exports or reduce imports going forward, then we have questions to address about sustainability.

If the scale of deficit is small enough, it might be okay! Our economy might grow fast enough to overwhelm even a continually growing loss of financial net worth.

But if the scale of the deficit is larger than the economy's growth can reliably be assumed to match, and if there's no plain dynamic by which the deficit purchases will ultimately repay or at least extinguish themselves, then there might in fact be a problem.

It's not as simple as "we're losing hundreds of billions of dollars". Of course not. We're buying stuff. But when we are buying stuff, in life and in business and as nations, it's important to think about what we are buying, whether it is worth it, and whether it's sustainable.

The answer to those questions might, as of three months ago, have been yes, it was worth it, and it was sustainable! My answer would have been no, we were buying too many consumables, we were building too little tradables capacity, we were too near levels of deficit that could spiral faster than economic growth could reliably stabilize.

There's a real argument about this! Perhaps it is my side that is mistaken!

But the fact that we are buying stuff, spending money rather than just losing money, is not a sufficient answer. We have to talk about what we are buying, how much, and why.

None of this is to rehabilitate Trump's tariffs which are, to use a technical term, fucking stupid.

If we decide that the trade deficit should be addressed at a policy level, we might start with industrial policy qua the Biden Administration, shifting economic output (and in turn inputs purchases) towards tradables production. We might also begin to assert control over our international balance directly, via diplomatic normalization of, and then gradual application of, tools like a foreign payouts tax.

Gradual.

Let's give the last word to Mr. Keynes:

[T]hose who seek to disembarrass a country of its entanglements should be very slow and wary. It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction.

Really from current account deficit countries to current account surplus countries, but let's not be pedantic. Usually trade dominates the current account. In exceptional cases we may have to discuss less usual considerations.
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draft by Steve Randy Waldman
2025-05-06 @ 11:35 AM EDT

Overall but not bilateral balance

Talking trade, I find people I speak to like that I'm willing to call out the Trump administration as idiotic for trying to bring every bilateral trade relationship into balance.

But, sotto voce, my interlocutors often don't quite get how I can strongly favor a norm of balanced trade while mocking attempts to balance individual trade relationships. Isn't any country's overall trade deficit or surplus the sum of its "bilateral" balances with individual trade partners? Yes it is!

So if we want to drive the deficit or surplus to zero, doesn't that mean we have to drive each component toward zero? Absolutely not.

Why not? Because negative numbers exist.

Suppose we want to drive the sum x + y to zero.

One way we can do that is to let x and y be positive numbers, and try to make them as small as possible. Another approach is to let x be as big a positive number as we want, and to try to drive y towards negative x!

The second approach is what we want from trade.

Let's consider an example.

Let's imagine there are three countries, Industria, Ironia, and Oceania.

The Industrians produce manufactured goods, but they require a lot of iron ore.
The Ironians mine lots of iron ore, but they care very little for manufactured goods. They love, love, love sushi though.
Oceania has the world's preeminent fisheries, and they really want top-of-the-line trawlers and yachts.

So, the Industrians buy $100B of ore from Ironia. The Ironians buy $100B of fish from Oceania. The Oceanians buy $100B of boats from Industria.

None of the "bilateral" relationships among these countries are balanced:

The Industrians have a $100B trade deficit with Ironia! They buy iron ore, but sell nothing to those hippies.
The Ironians have a $100B trade deficit with Oceania! They buy fish, but the fisherman have no use for iron ore.
The Oceanians have a $100B trade deficit with Industria! They buy so many boats, but the Industrians break out in hives if they ingest even a nibble of seafood.

None of the bilateral relationships are balanced, but all three of these countries stand in "overall" balance!

By convention, we let surpluses be positive numbers and deficits be negative numbers:

Industria's deficit with Ironia is offset by a surplus with Oceania. Industria's trade account looks like
+100 (Oceania) + -100 (Industria) = 0 (Balance!).
Ironia's deficit with Oceania is offset by a surplus with Industria. Ironia's trade account looks like
+100 (Industria) + -100 (Oceania) = 0 (Balance!)
Oceania's deficit with Industria is offset by a surplus with Ironia. Oceania's trade account looks like
+100 (Ironia) + -100 (Industria) = 0 (Balance!)

In the real world, of course, there are hundreds of countries, each one of which can have positive or negative balance with any trading partner.

There is only one way all those countries could be in universal bilateral balance. Each pair would have to buy exactly as much as it sells from each trading partner. This is the international-trade equivalent of barter, there can only be trade when and to the extent there is a "double coincidence of wants" between countries.

There are an infinite number of ways, however, that every country could be in overall balance while individual trade relationships are permitted to be arbitrarily positive or negative.

If we think of markets, at their best, as mechanisms that search for mutual gain, then a universal bilateral balance constraint leaves very little terrain to be searched.

A constraint of overall but not bilateral balance leaves an endless landscape for markets to explore. Even as it rules out an also endless, but I claim dangerous and usually undesirable, terrain of unbalanced overall trade.

Some nitpicks:

I don't, in fact, argue that there should be an absolute and inviolable overall balance constraint. I claim that overall balance should be a norm, countries ought to seek to be near there. But any country's overall balance will never perfectly be zero. And occasionally countries will have good reason to deviate from balance. I don't claim we should forbid that. I claim we should insist that it be justified and limited in time and extent, on both sides of the imbalance. And that countries should have high quality tools they can unilaterally deploy to bring themselves out of overall deficit.
I'm writing in terms of "trade balance", but more technically what I mean is "international balance" or "current account balance". The "trade balance" is sometimes taken to refer only to trade in goods. I'm including services as well in the trade we are trying to balance. And there are other, usually small, items besides trade that contribute to a country's "current account" balance, including net income from international investments, and transfers, like remittances from migrants to their home country.

draft by Steve Randy Waldman
2025-04-30 @ 08:15 PM EDT

How can taxing foreign investors balance trade?

I've been advising — for years but especially over the last few weeks — that countries should use capital controls rather than tariffs to bring their trade with the rest-of-the-world toward balance. In particular I advocate a tax on payouts (interest, dividends, capital gains) to foreign securities holders.

Chatting about this, a lot of people just don't "get it". Why would taxing foreigners' holdings of a country's stocks and bonds help to cure a trade deficit, where a country is importing more value than it exports?

People find it obvious why tariffs might help. Tariffs directly increase the cost of imports. This higher cost passes through, at least in part, to higher prices, reducing the quantity that domestic consumers buy, bringing the value of imports purchased down and closer to the value of exports sold.

But tariffs "help" indiscriminately, and can do a lot of harm rather than good. If trade is already balanced and a country imposes a tariff, it can bring trade with that country out of balance, as fewer goods are imported but exports are unaffected. If a country imposes tariffs and then its trading partners retaliate by doing the same, the effect on balance is indeterminate. But the overall result is a damaging tax on trade, even trade that would otherwise have been in perfect balance.

If we think (as I think) that balanced international trade is generally good — comparative advantage! — but that trade imbalance is dangerous, then tariffs are a crude treatment with terrible side effects. Yes, tariffs can cure the disease of imbalance, but often at the cost of eliminating gains from trade. If your wrist is bleeding, amputating at the elbow could cure that and save your life. It would be better, however, to deploy disinfectants and stitches and save your hand as well.

OK. So why would taxing foreign investors be better? Why would it address the problem at all?

Let's think through what happens when there's unbalanced trade. Let's say the United States purchases $2T worth of imports, but only sells $1T worth of exports. That means the US sends to rest-of-world a net one trillion dollars. (We sent $2T to them, they sent $1T back to us.)¹

Rest-of-world has two things they can do with that trillion dollars. They can (1) purchase more goods and services from us, which would eliminate the trade imbalance. Or they can (2) park the dollars in US investments — Treasuries, stocks, bonds, bank deposits, whatever — to earn a market return on the difference.

Those are rest-of-world's only two choices! Our direct trading partner might spend the dollars on goods or investments from a third country, but then the third country — still part of rest-of-world! — faces the same two options.²

If the US taxes foreigners' investments, it reduces the attractiveness of option (2), and so increases the relative attractiveness of option (1). Rest-of-world will devote a greater share of its proceeds from exporting to the US to purchasing goods and services from the US, since its alternative, investing in US securities, is now a much worse deal.

You can also conceive of the effect as similar to a tariff. When foreign suppliers in aggregate set their prices, they do so assuming they'll earn a market return on the net proceeds of their sales. If part of that return is going to be taxed away, that will either eat into their profit margins, or else they will have to raise their prices to cover the tax, reducing US consumers' willingness to buy. Essentially, the dollars they receive are discounted dollars, only worth say 90¢ each, if they plan to hold them for a long period of time. But if they choose to use those dollars to buy US goods and services, that 90¢ of value converts back into a full dollar!

Unlike a tariff, the effect of the tax disappears entirely if trade is balanced. As long as rest-of-world buys as much from the US as it sells to the US, no US dollars have to get parked by foreigners in US investments. Conceptually, the US and rest-of-world exchanges goods for goods. No cross-border investments are provoked, no tax is paid.

Taxing foreign investors does nothing to discourage balanced trade. Even if every country in the world implemented this kind of tax, global comparative advantage could remain fully exploited to help the world prosper. David Ricardo's parable presumed balanced trade. Taxing foreign investment — a residuum of unbalanced trade — does not interfere with the mechanism at all.

Unbalanced trade always implies foreign investment, but not all foreign investment is a result of unbalanced trade. Taxing foreign investment has no effect on balanced trade, but it does have a different side effect. It would discourage cross-investment, where rest-of-world might buy US investments in exchange for Americans investing abroad.

This side effect is, for the most part, desirable. A tax is not a ban. Foreign cross-investment, motivated by investors' desire to diversify or their enthusiasm for particular projects, would still occur. But it would be less remunerative, and so occur less. That's for the best! The way you reconcile global capitalism with vigorous democracy is to ensure that ownership of domestic production is mostly domestic, and let the benefits of globalization take the form of gains from trade.

I've used "United States" and "rest-of-world" to talk this through, but the reasoning does not depend on any sort of American exceptionalism. I initially wrote in terms of "home country" and "rest-of-world", but it seemed awkward. Investment taxes, unlike tariffs, compose. Every country in the world at risk of an undesirable trade deficit could impose this kind of tax, and it would cause no interference to balanced trade.
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Holding the money in paper cash might be an option in theory, but not really. That would be taxing themselves of all investment returns they would otherwise earn, letting inflation eat away at their wealth, and bearing costs and risks to secure it. Unless investment is very heavily taxed, it will remain superior to cash. Another option would be to purchase rest-of-world securities from the United States. But that option quickly exhausts itself as US investors sell off the rest-of-world securities they are willing to sell at market value, then demand a premium that eventually comes to match the tax for distorting their desired investment portfolio.
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draft by Steve Randy Waldman
2025-04-27 @ 12:50 PM EDT

Balance as a norm

My previous two pieces — and probably more to come! — have argued in favor of reimposing a strong international norm of balanced trade.

My friend Steve Roth pointed me this morning to a piece by the always excellent Martin Sandbu, which argues the contrary, that the case for trade balance is overstated. I responded with a logorrheic BlueSky thread, which I reproduce for posterity below.

Where I think Sandbu and I agree is that there is nothing magic about the number zero. Many of the benefits attributed to balance can be achieved while running a modest surplus or a modest deficit. Enforcing balance as a never-to-be-violated constraint would be impossible and overly draconian. In any given year, nearly all economies will run at least a small surplus or deficit. Zero is an infinitessimal target.

But what I insist is that a norm of international balance is desirable. Most countries should be very near balance, especially over a several year cycle. The international trading system should encourage the use of tools on the capital side of their balance of payments by which countries can bring their own trade towards balance.

Countries should not resort to tariffs for this purpose. Tariffs may — or may not! — have some role to play with respect to industrial policy, but they are poorly suited to promoting balance. Tariffs discourage balanced and unbalanced trade indiscriminitely, where capital-side interventions can target imbalance directly. Tariffs are costly and complex to enforce, are perceived by trading partners as hostile, and are unusually susceptible to corruption. They are a poor tool, as we observe in real time.

But countries running large, persistent surpluses or deficits should be subject to a rebuttable presumption they are doing something wrong. We've collectively erred by tolerating and frankly encouraging persistent and growing imbalances in the trading system. I hope we survive the error.

The international trading system should be managed under a presumption that ownership of each country's productive capital is domestic, so that domestic governments are free to regulate, rather than forced to cede control to investor-protection mechanisms enshrined in treaties and managed by technocrats whose interests may be at variance with domestic publics'. In a world of balanced trade, a presumption of domestic ownership can mostly be true. In a world of unbalanced trade, it cannot be.

Anyway, what follows is my long BlueSky thread, "rolled-up" and lightly edited, and then a few paragraphs of extra commentary:

I agree with @martinsandbu.ft.com on the jobs case! Manufacturing (like production in general) is not a jobs program. The wealthier we get, the more paid work will migrate to services we value for very human-specific reasons, relationships, care, trust, insight, just the pleasure of interaction.

But I think Sandbu was a bit slippery in migrating from the general case to the weaker jobs case. What we want from manufacturing is not jobs, but capabilities: “We” need to be capable of making and doing things, and the only way to build and sustain and improve that kind of capacity is doing.

Why do “we” need to be capable of doing these things? The obvious shut-down-conversation case is “national security”, but the broader cases are national resilience and technological capability. The last but not least case is conflict avoidance.

The traditional liberal case that interdependence breeds peace has failed spectacularly and famously over and over. Today we live in an era of @himself.bsky.social’s and @abenewman.bsky.social's "weaponized interdependence".

Peace is better served by reducing the vital-national-interest-ness of cross-border entanglements than by magnifying those and hoping the cost of breaking anything overwhelms inevitable strife.

And all of this is before we consider the financial side of unbalanced trade. The US has been a bit of a special case, pre-now, because of the centrality of the dollar and the apparently inexhaustible willingness of trading partners to hold USD assets, even through weakening-dollar periods.

But trade imbalance often presages financial crises, both domestic and international. Or sometimes orderly devaluations. But the more market participants anticipate devaluations, shockingly, the less there is actual trade imbalance. The anticipation disciplines the trade.

The last bit worth considering is who “we” are in this story. Must it be a nation-state? Is the EU one “we” or many countries? Why can Florida run a persistent trade deficit with other states? (I imagine it does, not sure.) Why was that a bigger problem for Greece?

I think the answers here have to be textured. For resilience and national security, “friendshoring” might be sufficient. Indeed, from a resilience perspective, you want to diversify across domestic and foreign supply, as well as among different foreign suppliers.

As @martinsandbu.ft.com suggests in the piece and in a reply, there’s nothing special about balance, the arbitrary zero point, for national security or resilience. Unbalanced friendshoring may be fine, with sufficiently reliable friends.

But to say there’s nothing special about zero doesn’t mean it’s fine to stray arbitrarily negative for indefinite periods of time. If you are going for resilience by diversification, you do want a meaningful domestic component to your portfolio. Too negative too long and you’ll lose that.

The main, most important thing (for a large, diversified economy with geopolitical pretensions) is to maintain generalized capacity, or “metacapacity”, and that requires substantial, continuous doing and improving of things in the world you value and rely upon.

(Hypothetically a trade deficit country whose paper is coveted abroad could use its fiscal flexibility to run a kind of noncommercial industrial university system, maintaining, building, innovating capabilities that could be scaled up should terms of trade shift. Whether this could “work” without the feedback of market discipline is, I think, an open question, but it’d obviously be hard to get right, and hard politically to sustain.)

The place where that zero point of balance is not in fact arbitrary is the financial side.

“Friendshoring” might assist with resilience and national security with sufficiently good friends, but durably unbalanced trade means someone is accumulating promises from a “friend” whose economy may be shifting from the tradables that might repay them.

Again, quantities matter. A country can run a small deficit relative to its growth indefinitely, and the potential burden of accumulated promises will remain modest. Even on the finance side, the zero point isn’t magic, we shouldn’t make a fetish of it.

But if the scale of accumulated promises is growing relative to the deficit economy, that’s going to yield problems if it continues indefinitely, perhaps even do damage to that “friend” assumption in friendshoring.

That’s why I think the “we” ultimately has to be defined by fiscal union. Florida can run its deficits, because we gradually and as a matter of course redistribute to fill in the holes in net worth it would otherwise yield.

("We" in that last meaning other states, the rest of the fiscal union including surplus states.)

The EU can become more relaxed about its internal trade balances if it builds up similar redistributive and mutual insurance mechanisms between states.

If we end up with some persistent deficit countries, but with deficits small enough to be overwhelmed by growth, that’s fine.

But letting zero be the normative attractor serves that cause of “small enough to be overwhelmed by growth”.

Without that norm, we find ourselves untethered, making excuses, eventually in crises — internally due to lost capability, and externally due to accumulating promises that will become one party’s terrible burden or another party’s unfair loss.

Addendum: I want to be very clear that I think Trump’s tariffs are hideously stupid, even though overall balance is a thing the US legitimately should work toward.

I’d propose a foreign payouts tax to help us grope towards balance.

That's it for my thread! A few more comments...

Sandbu suggests

the current level of the US current account — just over 3 per cent of GDP — should not be unsustainable for an economy that can count on nominal growth of 4 per cent over the long term and enjoys global reserve currency status (if it can keep it).

I think this is a lot too sanguine. GDP may not be the right denominator. We want to compare the current account deficit against a measure of the economy's capacity to produce tradables. The US current account deficit is now more than a third of its total exports. Maybe that would be okay if we were sure this fraction would be stable. But since 2014, exports have been growing more slowly than GDP. It seems worthwhile to remedy that going forward.

Sandbu is correct that, by any measure, the US current account deficit was larger during the mid-aughts. In those days, optimists could console themselves with "dark matter", a name given to the discrepancy between the US' very large current account deficit and its stable NIIP ("net international investment position").

Unfortunately, that stability has disappeared in the intervening years. The US NIIP has deteriorated sharply whether measured in absolute terms, as a fraction of GDP, or as a fraction of exports.

This "deterioration" is due in part to the US' persistent current account deficit, but also due to what seemed like good news for America. Since the financial crisis, US assets (and so US assets in foreigners' hands) outperformed foreign assets (and so foreign assets in US hands), causing the net value of assets foreigners hold to grow even faster than the growth suggested by the assets they receive from unbalanced trade. Call this "dark antimatter"!

Whether due to good news or bad, the value foreign holders expect their US asset holdings to deliver has been growing, much much faster than the US tradables economy or the US economy writ large. The probability of disappointing those who've placed a high value on US promises, one way or another, is likely also growing.

We are faced with the fundamental financial-side cost of international imbalance. If a country's persistent current account deficits are not corrected by other means, they will eventually be corrected by some kind of disappointment of foreign assetholders. Those episodes of disappointment can be quite dangerous, to the deficit country, to the human race.

We are in a rather terrifying moment. The right thing to do would be to bring leaders of goodwill together in something like a new Bretton Woods conference, to agree upon a fair path back toward balance that minimizes disruption and supports the growth of all parties.

I wish I had more faith in our current leadership.

draft by Steve Randy Waldman
2025-04-24 @ 06:30 PM EDT