Dollar Dominance, Trade Deficits, and Neutral Reserves

Summary

The May 16, 2025 episode of What Bitcoin Did features Lyn Alden analyzing how dollar reserve status sustains structural trade deficits and periodic funding stress. Alden explains base versus broad money and the eurodollar layer, tying Treasury market fragility to dollar-IOU leverage and the need for policy backstops. She outlines tactical currency options, limits to tariff-led reshoring, and a case for expanding neutral reserves—gold today and potentially Bitcoin—to distribute risk.

Take-Home Messages

1. Reserve Burden: Dollar dominance sustains a structural U.S. trade deficit and concentrates gains in finance while pressuring tradable sectors.
2. Liquidity Fault Lines: Funding shocks can render Treasuries illiquid, requiring rapid central-bank facilities to stabilize markets.
3. Policy Sequencing: Tariffs and Plaza-style accords are tactical tools that do not resolve the structural reserve burden on their own.
4. Reshoring Constraints: Automation intensity and high healthcare costs cap domestic job growth from industrial policy.
5. Neutral Reserves: Increasing allocations to gold today—and potentially Bitcoin—can share reserve functions and reduce single-issuer risk.

Overview

Lyn Alden argues that network effects in dollar invoicing keep the currency persistently strong, turning foreign demand for dollars into a standing U.S. trade deficit (see my Bitcoin Worlds working paper for more on the role of unit of account - and invoicing - in post-Keynesian futures). She describes how capital inflows lift financial centers while industrial regions struggle against an overvalued exchange rate. The outcome, she says, reflects a system-level equilibrium rather than a single policy mistake.

To explain recurrent dollar “shortages,” Alden separates base money from bank credit and highlights the offshore eurodollar layer. A large stock of dollar IOUs relative to base money can turn modest shocks into funding squeezes that force deleveraging. In those moments, private balance sheets fail to clear markets without official support.

She points to March 2020 when off-the-run Treasuries went illiquid, prompting the fastest Federal Reserve intervention in recent memory. Alden treats that episode as a structural warning because leverage and collateral dynamics recur across cycles. This reframes Treasury market plumbing as critical infrastructure that now requires standing backstops.

On solutions, Alden distinguishes tactical dollar weakening from a strategic plan to share reserve functions. She cautions that sudden tariff regimes freeze business plans and that reshoring will be automation-heavy and cost-constrained. As a longer-run outlet, she argues for raising neutral-reserve shares—gold today and potentially Bitcoin—to decentralize global savings away from a single issuer.

Stakeholder Perspectives

1. Central Banks: Preserve dollar-liability matching while piloting frameworks to hold a larger share of neutral reserves without impairing liquidity.
2. Finance Ministries: Coordinate tariff pacing and any currency accords with market-plumbing safeguards to avoid procyclical stress.
3. Manufacturers: Seek transparent policy timelines and FX stability to justify multiyear capex despite automation and input-cost pressures.
4. Institutional Investors: Monitor dollar-basis spreads and Treasury microstructure for early stress signals that may precede policy action.
5. Bitcoin Ecosystem: Build custody, accounting, and volatility-management standards that make Bitcoin a viable complementary reserve asset.

Implications and Future Outlook

If policymakers treat dollar strength as cyclical, the system will rely on episodic accords and ad hoc facilities that reset rather than resolve imbalances. A structural path requires expanding neutral-reserve holdings so savings pools have credible alternatives to U.S. balance sheets. Expect incremental adoption led by institutions with flexible mandates, paired with enhancements to market backstops.

Treasury microstructure will remain a focal point as leverage and collateral chains amplify stress. Building real-time indicators of dollar-IOU growth against base money can guide earlier, more targeted interventions. Over time, standing facilities may evolve into explicit public-utility infrastructure for core funding markets.

Industrial policy will hinge on realistic employment expectations under high automation and healthcare costs. Stable FX guidance and predictable tariff sequencing can unlock investment despite thinner labor gains. Parallel development of reserve-sharing arrangements can lower currency volatility that would otherwise deter onshoring decisions.

Some Key Information Gaps

1. What market microstructure indicators best forecast emerging Treasury illiquidity in off-the-run issues? A validated indicator set would raise reaction speed and precision for policy and risk managers.
2. What metrics can quantify the eurodollar system’s leverage relative to base money in real time? A transparent leverage gauge would help calibrate facilities before stress becomes systemic.
3. What tariff pace and transparency minimize business paralysis while improving negotiating leverage? Evidence on sequencing can reduce policy-induced uncertainty and sustain capex.
4. Under what conditions does tactical dollar weakening improve trade balances versus merely resetting the cycle? Identifying thresholds prevents wasted political capital and guides coordinated action.
5. What milestones would indicate Bitcoin’s readiness as a neutral reserve asset alongside gold? Clear criteria on liquidity, custody, and liability matching can structure prudent, phased adoption.

Broader Implications for Bitcoin

Reserve Diversification and Monetary Governance

Expanding neutral-reserve holdings would shift global monetary governance from a single-issuer model toward a portfolio of stores of value. That transition could temper spillovers from U.S.-centric funding cycles and reduce the frequency of emergency facilities. Rule-based allocation frameworks may emerge that formalize weights for gold and potentially Bitcoin alongside sovereign assets.

Market Plumbing as Public Infrastructure

Treasury market stability functions like critical infrastructure, yet monitoring remains fragmented across venues and instruments. Treating core funding markets as public utilities implies standardized transparency, contingency drills, and permanent backstops. This approach would professionalize crisis response while lowering tail risks for pension funds, insurers, and dollar-linked economies.

Industrial Strategy Under Strong-Dollar Constraints

Even with reserve-sharing, a strong-dollar bias can persist, limiting broad employment gains from reshoring. Industrial strategy will likely prioritize capital-intensive nodes—power electronics, advanced materials, and logistics automation—over labor-heavy assembly. Regions that align grid upgrades, permitting reform, and trade policy with predictable FX guidance will capture the durable segments of the value chain.

Institutional Pathways for Bitcoin Treasury Use

If institutions adopt Bitcoin as a small, rules-based reserve slice, they will demand audited custody, conservative valuation haircuts, and liability-matching playbooks. Meeting those demands could standardize Bitcoin’s role as a complementary reserve rather than a speculative bet. Over time, that pathway would link Bitcoin more tightly to real-economy collateral chains without displacing existing sovereign instruments.