yes! in various revisions in my mind of the foreign payouts tax idea, i’ve sometimes exempted equity and FDI because imbalances can resolve by revaluation on the balance sheets of parties knowingly willing and able to bear risk rather than disruptive default or revaluation of “safe” securities. 1/

in my current iteration, i think a foreign payouts tax should be universal (ie apply to equity and FDI), but countries that wish to encourage foreign investment in a meaningful, risk-bearing sense (as opposed to the “investment” of accepting paper for goods sold) can design particular carve-outs. 2/

the reasoning is that a blanket exception by category creates too urgent a game of whac-a-mole of foreigners hiding debt claims behind the “equity” of shell companies that hold debt. 3/

but if all foreign payouts are taxed by default (including capital gains), states can design particular, restrictive criteria for firms able to issue untaxed payouts to foreigners who will be meaningful risk-bearing investors, and understand macro adjustment risk as a risk they are bearing. /fin

any apologies are undoubtedly due from me! 1/

my model is that foreigners mostly hold US dollar assets because they believe they’ll be able to redeem them for goods and services they use in their own country when they need to. 2/

that emphatically does not mean, in the first instance, redemption for US produced goods and services. 3/

most foreign dollar holders expect they’ll be able to sell their dollars for goods and services from almost any country. 4/

but that begs the question, why do those third countries accept the dollar as payment for goods and services? they also expect they’ll be able to buy stuff, but what’s the bottom turtle? 5/

one answer to this question is there is and doesn’t need to be a bottom turtle. the US dollars centrality and conventional use in payments is enough for it to maintain value by a kind of momentum, it’s just a kind of confidence game, but a stable one. 6/

a fancy way of putting this is to impute the dollars value to “liquidity services” — it’s valuable because people treat it as valuable when they transact. 7/

i think this is certainly part of the story, but unsatisfying as a complete explanation. crypto dudes (undercapitalized stablecoins) are constantly trying out the theory that money is a confidence game. inevitably there’s confidence until there isn’t. then there’s a run. 8/

a stable currency always in some way depends on some kind of backing value that, in extremis, can tame runs. 9/

for domestic currency, it’s the state’s credible commitment to manage redeemability for consumer goods at a price level, the ability of currency to satisfy the skein of debts the banking engenders, and in extremis the state’s ability to tax to create demand for its scrip. 10/

what undergirds value for foreign holders, though? the issuing state’s commitment to stay redeemable for domestic consumer goods at a price level means much less, since most domestic consumer goods foreigners can’t use. (e.g. redeemability for US rent and healthcare). 11/

the state can’t tax foreigners. if there’s going to be an independent source of value to provide a backstop to the confidence game, it has to be some promise of redeemability denominated in tradables. 12/

(now i have traded one tweet’s worth of unclarity to an unlucky 13! sorry!) /fin

i don’t think we have to repay. we just have to service. we, like most enterprises, have a perpetual capital structure, people hold our paper. but to undergird the international value of our paper, it should be credibly redeemable for goods and services. 1/

and we shouldn’t be selling endlessly more, unless that more is financing assets that produce tradable goods and services of value greater than the value we mean to support of the paper we issue. /fin

absent policy to encourage exports / restrain imports, what prevents, why shouldn’t we expect an expansion like during the aughts? the benefit from petroleum balance is already passed, China is likely dominant in new industries (autos, batteries, etc) going forward. 1/

one can make 4% into the new zero (i don’t recommend it, but if long-term US NIIP/GDP stability is your measure of alarm, okay), but then you do need some kind of policy or plan to defend 4%. /fin

good piece on this here. www.rabobank.com/knowledge/d0... yes, it’s true that the decline in US NIIP has in recent years been driven by US asset outperformance. (dark antimatter) but in prior years was restrained by underperformance. (dark matter) 1/

one might call it oscillation around a center of gravity defined by the cumulative current account. so, yeah, if the current account can be stabilized at less than GDP growth, this center should continue to remain pretty stable. but that’s a pretty big if, absent some policy to stabilize it! /fin

in this context, capital-side policy refers to the opposite of current-account-side policy, specifically with respect to balance of payments. loans subsidized via income-contingent repayment are a form of industrial policy, not intended to regulate balance of payments. 1/

what i’m referring to more specifically by “capital-side policy” is something like a foreign payouts tax, as described here. drafts.interfluidity.com/2025/04/01/i... 2/

the two are complementary, i think. in general, absent balance, any form of fiscal stimulus risks leaking to external demand, contributing to trading partners’ mercantilism. 3/

the ability to impose a (near) balance constraint reduces this risk with respect to industrial policy by stimulus (which i consider far preferable to industrial policy by tariffs). 4/

so i think a foreign payouts tax makes more plausible income-contingent repayment (and other forms of subsidy), not bc the tax recoups the cost, but bc under balance, the fiscal expenditure will flow only to domestic balance sheets, susceptible to taxation and/or redistribution by domestic policy 5/

i think all of this is very Ricardian! Ricardo’s comparative advantage trades were balanced. He did recognize that gold could “balance” trade reflecting past wealth rather than comparative advantage, but perceived mechanisms that would limit gold-“balanced” trade, eventually enforce balance. 6/

those mechanisms don’t so reliably work when gold is replaced by securities, especially fiat denominated securities. a foreign payouts tax is just a mechanism to reimpose the kinds of constraints Ricardo perceived existed naturally under a gold standard. /fin

i don’t think there is a really good measure of tradables capacity. overall GDP is wrong, since much economic activity is not internationally tradable. exports are an underestimate, the economy produces more tradables than it exports and there may be more tradables capacity than actual production 1/

exports was a “cheap” alternative to GDP that’s readily available, but not “right”. i don’t know what right would be. 2/

by Ricardo do you mean species flow? i don’t think that mechanism really functions in a fiat world, particularly with respect to an issuer of widely accepted fiat. the price level is pretty decoupled from the internat’l balance in modern economies. but that’s maybe not what you’re referring to? /fin