Neil Irwin takes issue with Donald Trump using the trade surplus between countries as a scorecard on trade. He is largely right with a couple of important qualifications.

Irwin notes that a country with a trade surplus should see its currency rise against the dollar if it doesn’t reinvest the money in dollar assets. He then comments that if it does reinvest the money in dollar assets, whether or not it benefits the United States depends on what the money is used for. As Irwin points out, in the last decade the money was used in large part to invest in residential housing and to inflate the housing bubble. This was of course not useful.

But there is a deeper point here. In an era of “secular stagnation,” which means there is not enough demand in the economy, the foreign assets may in effect be invested in nothing. Most of the foreign capital that went into the United States in the housing bubble years did not get directly invested in housing. It was invested in government bonds and short-term deposits.

These investments don’t directly create any jobs; they are simply assets on a balance sheet. Insofar as foreigners invest their surplus dollars in U.S. assets not directly linked to employment (which will generally be the case) a trade deficit will be associated with higher unemployment, unless the economy has some other force generating employment to offset it.

Currently we are running an annual trade deficit of around $540 billion (@ 3 percent of GDP). This could be offset by spending more on education, infrastructure, clean technology or other areas, but the Very Serious People will not let us run larger budget deficits. In that context, it is quite reasonable to link a trade deficit to higher unemployment, so Trump is not wrong in that respect.

The other issue that Irwin doesn’t get quite right is the reference to the dollar as “the reserve currency.” The dollar is a reserve currency, but not the only one. Countries also hold euros, yen, British pounds, and even Swiss Francs as reserve currencies. The dollar is by far the predominant reserve currency, but there is no necessary reason that countries need to accumulate more dollars if they want more reserves. They reallocate their holdings among these currencies all the time, and countries could always decide to increase their reserve holdings by increasing holdings of other reserve currencies rather than dollars.

This brings up a second and more important point. There is no fixed relationship between GDP or trade and the amount of reserves that countries need to hold. In fact it is reasonable to believe that due to improvements in technology and the financial system, the amount of reserves would fall over time relative to the size of countries’ GDP or their volume of trade, just as the amount of money that banks need to hold as reserves has fallen sharply relative to the amount of money they hold as deposits.

In fact, the amount of money that developing countries held as reserves rose sharply in response to the botched Washington led bailout from the East Asian financial crisis. In the wake of this bailout the countries of the region and other countries in the developing world began to accumulate massive amounts of reserves and especially dollars. This sent the value of the dollar soaring and led to the sharp rise in the U.S. trade deficit. It had been around 1.0–1.5 percent of GDP in the years prior to the East Asian financial crisis. It reached almost 4.0 percent of GDP by the end of 2000 and peaked just short of 6.0 percent of GDP in 2005.

This explosion of the trade deficit is the main cause of “secular stagnation” in the United States. If the trade deficit were back at its mid-1990s level, it would imply an addition to aggregate demand equal to roughly 3.0 percent of GDP or $540 billion a year. (This assumes a reduction in the trade deficit of 2.0 percentage points of GDP and a multiplier on net exports of 1.5, bringing the full effect to 3.0 percent of GDP.) The sharp rise in the dollar and the trade deficit in the late 1990s is why the bailout from the East Asian financial crisis is viewed as the root of all evil.

Anyhow, contrary to Irwin’s piece, having the dollar as a reserve currency does not doom the United States to running large trade deficits. The problem is inept management of the international financial system.