The Current Account Deficit Narrowed, But Don’t Celebrate Yet
The Bureau of Economic Analysis reported on Wednesday that the U.S. current-account deficit narrowed sharply in the fourth quarter, falling 20.2 percent to $190.7 billion from a revised $239.1 billion in the third quarter. As a share of GDP, the deficit dropped from 3.1 percent to 2.4 percent.
Expect to see this framed as good news. In a narrow sense, it is. Exports rose, imports fell, and — most strikingly — the balance on primary income flipped from a deficit in the third quarter to a surplus in the fourth. That means Americans earned more on their investments abroad than foreigners earned on their far larger holdings here in the United States.
That last point is the one the economics establishment will seize on. The U.S. has a net international investment position of negative $27.54 trillion, meaning foreigners own $27.5 trillion more in American assets than Americans own abroad. And yet the income still flows our way. This is what economists call the exorbitant privilege: American investors hold higher-yielding foreign assets — things like equity stakes, direct business investments — while foreigners load up on lower-yielding Treasurys and agency bonds. The return differential means that the U.S. can be the world’s largest debtor nation and still come out ahead on the income line.
If that sounds too good to be true, your instincts are working.
The third quarter was revised to show a $2.5 billion deficit on primary income , down from an initially reported $5.2 billion surplus. That is a $7.7 billion swing from a single round of revisions. The exorbitant privilege is real, but it is not a law of nature. It is a product of the dollar’s reserve currency status, the depth of U.S. capital markets, and the willingness of foreign governments to accumulate low-yielding dollar assets for strategic rather than financial reasons. Any of those conditions can change.
For the full year, the current-account deficit was $1.12 trillion. It narrowed from 2024, dropping from 4.0 percent of GDP to 3.6 percent. But a trillion-dollar annual deficit is not a sign of balance. It means the United States sent over a trillion dollars more to the rest of the world for goods, services, and transfer payments than it received back.
The net international investment position tells the same story. It deteriorated by a full $1 trillion over 2025, moving from negative $26.54 trillion to negative $27.54 trillion. That is a number marching steadily in the wrong direction, and no amount of favorable return differentials changes the trajectory of the gross position.
Charging the World for Our Reserve Currency
This is exactly the problem that Federal Reserve Governor Stephen Miran identified in an April 2025 speech at the Hudson Institute, when he was serving as chair of the Council of Economic Advisers. Standard trade models, Miran argued, assume that deficits are short-lived and self-correct through currency adjustment. But the U.S. has run current-account deficits for five decades. During that time, the dollar has appreciated, not depreciated—the opposite of what economic theory says should happen. “The long run is here, and the models are wrong,” Miran said. The reason, in his view, is that insatiable foreign demand for dollar reserve assets keeps the currency too strong for international flows to balance.
Importantly, Miran does not think the dollar’s reserve status is a problem to be solved. He views it as a global public good that the United States provides — one that underwrites the international trading and financial system. The problem, in his framework, is that the rest of the world has been free-riding on that service. Tariffs, in this view, are not a rejection of the reserve currency role but a way of charging for it — a mechanism to share the burden that persistent deficits impose on American workers and communities.
Yesterday’s report is a case study. The deficit narrowed in Q4, but the full-year number was still above $1 trillion, and the NIIP sank another trillion deeper. The currency did not adjust to close the gap. The models say it should have. It didn’t.
And there is a distributional problem that the headline numbers obscure. The primary income surplus accrues to the Americans who own foreign assets — corporations with overseas operations, institutional investors with global portfolios, wealthy individuals with diversified holdings. The trade deficit in goods, meanwhile, is borne by the workers and communities that lost manufacturing capacity to foreign competition. The current account may net out to something manageable in an economist’s spreadsheet. It does not net out so neatly in Youngstown or Saginaw.
The rebalancing of America’s international accounts deserves to have been a central policy objective of any presidential administration over the past three decades. The Trump administration, however, is the first to recognize this. It will not happen easily. But the only way to get to the destination is to start moving in the right direction.
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