Via the always provocative GaveKal:
Throughout my career, I have always found that it pays to bear in mind Jacques Rueff ’s notion of US “imperial privilege.” Put succinctly: the US has long been the only country able to settle its current account deficits in its own currency. So, when the US runs a current account deficit, it pumps large quantities of US dollars abroad, many of which flow into the foreign exchange reserves of countries running current account surpluses. These countries then take these dollars and buy US treasuries, which are held in custody for them by the Federal Reserve. In effect, the US current account deficit finances the US budget deficit.
For years, the system worked like a dream. Historically, around one-third of the dollars exported via the US current account deficit came back to the US as foreign exchange reserves, with the bulk of the rest likely being used by the private sector to fund purchases of US assets and as working capital to finance international trade.
