United States financed its deficits by running down its reserves/savings and building up a lot of debt that is
owed to foreigners. The chart below shows the net international investment position of the United States as a
percent of US GDP. It conveys that, while the US used to hold more foreign assets than foreigners held US assets,
that has strongly reversed. That is because the US borrowed a lot from the rest of the world and drew down assets.
The charts below show the debt piece—i.e., a) the total debt the United States owes the rest of the world and b) the
total debt the United States owes the rest of the world minus the total debt the rest of the world owes the United
States. As shown, while the US had no significant foreign debt at the beginning of this new world order, it now has
large foreign debts. Fortunately for the US (and less fortunately for others), this debt is in US dollars.
As for reserve assets, the charts below show both gold and non-gold reserves for these four major powers since
1900.
The first set of charts below shows a) the total amount of gold reserves (in volume of gold terms), b) the total value
of the gold reserves as a percent of the country’s imports, and c) the total value of gold reserves as a percent of the
size of the economy for the US, Britain, the Soviet Union/Russia, and China. They are meant to convey a picture
of how much savings in gold these countries had and have a) in total, b) in relation to their needs to import from
abroad, and c) in relation to the size of their economies. As shown, the United States had enormous gold
reserves—approximately 10x those in the UK—and was tremendously rich by these standards in 1945,
which came about by its large net earnings previously shown, and the US spent down these gold reserves
until 1971 when it was forced to stop redeeming its paper money for gold. Since then the quantity of US gold
reserves has remained virtually unchanged and the value of these reserves has changed with changes in its

market price. As shown below the UK drew down its gold reserves to very low levels, while Russia and
China have built theirs up in recent years, though they remain low.
However, gold reserves are not a country’s only reserves, especially lately. Since central banks hold foreign-
currency debt assets (e.g., bonds) as well as gold assets in their reserve savings, the size of their total reserves does
a better job of conveying their savings. The picture of the changes in this measure of relative savings is shown in
the charts below. Note in the charts how enormous the US total reserves were in 1945 (accounting for about
8.5 years of imports) relative to those of other countries and note how enormously the relative sizes of these
reserves have shifted since then, especially with the rise in total reserves in China. Note that China now has
the largest foreign-exchange reserve and the US doesn’t have much. As shown above, the US and the UK have
around 70 days of imports in reserves, while for Russia and China that figure is around 700 and 600 days,
respectively. The gap in the chart in the war years period was due to an absence of data during that period. As
explained in Chapter 1, a classic dynamic is that non-reserve-currency countries that want to save naturally want to
save in reserve currencies, which results in them lending to the reserve currency country. That happened with the
US and its dollar-denominated debt. It was especially true in the US-Chinese relationship over the 30-40 years
when the Chinese produced goods inexpensively and sold these goods to eager Americans buyers who wanted to
pay for them with borrowed money that the Chinese lent them from their export earnings because the Chinese
wanted to save in dollars. As a result of that the Chinese are now holding about $1.1 trillion of US debt, which is
about a third of their total reserves though less than 5% of US debt. Japan holds about $1.2-1.3 trillion of it.
Because these debts are denominated in US dollars the US won’t have a problem paying them back because the
US Federal Reserve can print the money and pay them off with depreciated dollars.