As #WynneGodley famously demonstrated, the financial balances of the three macro sectors — Govt, private, and foreign — must sum to zero. In other words, one sector’s #deficit is always another’s #surplus.

The idea that lower public deficits automatically shrink external gaps confuses correlation with causation — and history shows the opposite often happens. Sustainable rebalancing requires coherent adjustment across all sectors, not fiscal contraction in isolation.

… presuming investors fund their bets by short-term borrowing and pocket a return in line with the earnings yield,

The drop in prices is already weighing on company results in #China
-- Recent filings show losses widening and margins thinning, with many firms citing weak demand and price wars, chart @economics www.bloomberg.com/graphics/202...

These data help show how #Fed keeps the effective FFR (#FOMC’s preferred monetary policy instrument) between its upper and lower target range limits, chart @StLouisFed fred.stlouisfed.org/graph/

#Japanese and #Eurozone investors have strong incentive not to hedge USD exposure — otherwise they lose 2–3% annually.
→ This explains persistent capital flows into USD assets #unhedged, supporting the #dollar.