The Permanent Bid

Sometimes you hear three unrelated facts in a podcast and they rearrange how you think about everything else. That’s what happened when I listened to Brad Setser on Odd Lots this week, talking about the war in Iran and the future of the US dollar. It’s a topic that invites lazy takes — dedollarization, petrodollar collapse, the yuan’s rise — and Setser, as usual, brought the receipts instead of the vibes. But three things he said stuck with me, and they started connecting in ways I wasn’t expecting.

None of them fit the standard narrative. And together, they got me thinking about something I’m still not sure I’m right about.

There’s a standard story about dollar dominance that goes like this: foreign central banks hold dollars as reserves, mostly in Treasuries, and that’s what keeps the system going. The dedollarization crowd watches the reserve share tick down from 70% to 57% and declares the end is nigh.

Setser pointed out why this gets the story wrong. A standard international large-cap equity portfolio is 65-70% US-weighted. The Saudi Public Investment Fund’s international portfolio is roughly 80% dollar-denominated. A reserve portfolio, at 57% dollar, is actually underweight dollars relative to where the real money is flowing.

The shift is structural. Last year, the US current account deficit — over a trillion dollars — was financed roughly 50/50 between dollar debt and US equity purchases. Equities are now doing as much heavy lifting as bonds in funding the deficit. The world isn’t just lending to America anymore. It’s buying ownership stakes in American companies.

And here’s the thing about equity allocations versus reserve allocations: reserves can sit passively. Equity investors are chasing returns. They have benchmarks to beat, boards to answer to, retail investors checking their apps. The pressure to be in US stocks is active, continuous, and self-reinforcing in a way that Treasury holdings never were.

This one genuinely surprised me. The country most associated with petrodollar recycling — the original petrodollar — is now a net borrower from global markets.

Saudi Arabia’s current account swung from a $35 billion surplus in 2023 to a $6 billion deficit in 2024. This happened at $80 oil. The IMF projects deficits of $40-50 billion per year out to 2030. Total Saudi debt issuance — sovereign, Aramco, PIF, banks — has ballooned to over $6 billion per month. They are now the largest issuer in the JP Morgan Emerging Market Bond Index.

Why? MBS’s Vision 2030 bet. The Kingdom is pouring money into domestic development — real estate, entertainment, sports, data centers, tourism — all of which requires importing massive amounts of machinery, materials, and labor. Worker remittances alone jumped $8 billion in a single year as 1.4 million expat workers flooded in. The balance of payments breakeven oil price has climbed to roughly $95-100 per barrel. Bloomberg Economics puts the fiscal breakeven at $94, rising to $111 when you include PIF domestic spending.

The flow has completely reversed. Instead of selling oil, collecting dollars, and parking them in Treasuries, the Saudis are selling bonds to the world to fund construction at home. As Setser put it: they’ve “flipped and become a drain on eurodollars.”

The petrodollar recycling mechanism — the thing that textbooks and foreign policy think tanks still treat as a pillar of the dollar system — is functionally dead. The remaining oil surplus is concentrated in small states (Kuwait, Qatar, UAE, Norway) that together generate maybe $200 billion. That’s a rounding error next to the real story.

The real story is manufacturing Asia — a $1.5 trillion surplus, dwarfing anything from oil exporters. And the epicenter is China.

This is the part that seems paradoxical. China is the country most ideologically motivated to challenge dollar dominance. It’s the country that took its formal reserve dollar share down from 79% to 55%. It’s the country that set up the digital yuan, the CIPS payment system, the bilateral swap lines. And yet, before the Iran war, it was intervening in FX markets to the tune of $100 billion per month — and that flow was going into dollars.

The mechanics are straightforward once you see them. China’s export machine generates a lot of dollars. Exporters need to convert those dollars to yuan to pay workers and suppliers. If the PBOC let the market clear, the yuan would appreciate dramatically, making exports more expensive and threatening the employment of hundreds of millions of people. So the PBOC steps in, buys the dollars, and gives exporters yuan. Those accumulated dollars have to go somewhere.

China can’t stop doing this without fundamentally rebalancing its economy toward domestic consumption — something it’s been talking about for 20 years and hasn’t done. The CCP won’t let the yuan float because a floating currency means an open capital account, and an open capital account means surrendering control over the financial system. So China remains structurally compelled to keep accumulating dollars, regardless of how much its leadership resents the arrangement.

And when those dollars pile up in state banks, there’s increasing pressure to seek returns beyond low-yielding Treasuries. The same structural dynamic that forces dollar accumulation creates a bid for US risk assets.

So here’s the picture that emerged for me as I connected these dots.

The old petrodollar story was about bonds. Gulf states sold oil, collected dollars, bought Treasuries. That mechanism is dead — the Saudis are borrowers now, and the remaining oil surplus is too small to matter.

The new dollar story is about equities. The world’s surplus capital — from Chinese exporters, Korean retail investors, Taiwanese life insurers, Norwegian pension funds, Gulf sovereign wealth funds borrowing to invest — ends up in the same place: US stocks. Not because anyone loves America, but because there is no alternative at scale.

European equities have been a relative graveyard for a decade. Japanese markets are interesting but small and currency-volatile. China is uninvestable for most institutional allocators — political risk, capital controls, opaque governance. Where else can a sovereign wealth fund, a national pension system, or a hundred million Korean retail investors deploy capital and expect competitive returns?

And the dynamics are self-reinforcing. Setser described a textbook reflexivity loop with Taiwanese life insurers: they reduce their dollar hedges because hedging is expensive and the yen/TWD keeps weakening. The reduced hedging itself acts as a bid for the dollar, pushing it up further, making the unhedged position look smart, encouraging more of the same. Korean retail piles into US tech even while Samsung prints money, because SOX outperforms KOSPI in won terms, because capital outflows weaken the won, because... you see where this goes. Classic reflexivity.

Last year, Korea’s entire current account surplus outflow went into equities — a third from the national pension fund, two-thirds from retail. They chose US tech over their own world-class semiconductor champion. That’s not a trade. That’s a revealed structural preference.

I’ve been trying to stress-test this thesis. What could break the permanent bid? The more I think about it, the more resilient it seems.

A normal recession doesn’t do it. Every major drawdown of the past two decades — 2008, 2020 — saw aggressive policy responses that reinforced the buy-US trade. Global investors watched the Fed backstop everything during COVID and the rational conclusion was: the floor is real, I should be even more overweight. Each exercised put strengthens the thesis.

A geopolitical rupture doesn’t do it. Setser made this point well. Countries may view the US as reckless, even rogue. But you can still use the dollar to transact between Africa and Latin America efficiently, and that won’t be viewed as a political statement — just the most efficient way to get something done. China doesn’t love the US and never has; it still can’t extricate itself from the dollar system. The sanctioned countries that are forced off dollars — Russia, Iran — would generally prefer to be back on them.

A dollar crisis doesn’t do it — probably. This is the most intellectually interesting scenario. What if the Fed cuts aggressively during a crisis, the dollar sells off, and the reflexivity loop flips? Foreign holders lose money in local currency terms, triggering selling, which weakens the dollar further. But even here — where does the money go? There is no market with the depth, liquidity, and governance to absorb a reallocation of this magnitude. You’d get a temporary dislocation, not a permanent regime change, because there’s no destination.

The political put is global now. This is the part that really nags at me. If half the world’s savings are in US equities, a serious drawdown isn’t just a US market event — it’s a global wealth shock. Korean retail investors who are all-in on SOX would be furious. Norway’s pension system takes a hit. Gulf SWFs crater. Every government, not just the US government, has an incentive to support — or at least not destabilize — US markets. The Fed put has become a global put. It’s backstopped not just by the Fed’s willingness to act, but by every other government’s inability to tolerate the alternative.

There is one scenario that genuinely threatens the permanent bid, and it’s not geopolitical or monetary. It’s technological.

The structural bid rests on two pillars: the absence of alternative markets and the fact that US companies actually earn the money. The hyperscalers, Nvidia, the pharma giants — these are real monopolies with real cash flows. The world isn’t just buying US stocks because there’s nowhere else to go. It’s buying them because US companies dominate the industries that matter.

If something disrupted that — a genuine open-source AI ecosystem that commoditized what the hyperscalers sell, Chinese semiconductor self-sufficiency that broke Nvidia’s pricing power, regulatory fragmentation that balkanized the platforms — then the fundamental case weakens alongside the structural one. The “nowhere else to go” argument only works as long as the US is actually generating superior returns. If US earnings growth converges with the rest of the world, the structural bid becomes a structural trap: everyone is overweight an asset class that no longer deserves the premium.

This is where it connects to something I’ve been thinking about — the idea that the system we have is inherently volatility-suppressing. Everyone has an incentive to keep things stable. Every drawdown gets bought because it’s “cheap” relative to the structural bid. Realized vol stays low. But suppressed vol doesn’t mean absent risk. It means the tail gets fatter. The permanent bid is real, but it’s not a feature of healthy markets — it’s a symptom of a global financial system that has lost its ability to diversify. And that kind of concentration tends to end badly, even if nobody can tell you exactly when or how.

I keep coming back to the question of whether I’m seeing something real or just rationalizing my own portfolio. There’s a version of this essay that’s a sophisticated justification for being long US equities — and being long US equities has been the right call for so long that the reasoning almost doesn’t matter anymore.

But I think the framework is useful even if you’re skeptical of the conclusion. The petrodollar narrative is outdated. The real flows are equity flows, driven by structural forces that are larger and stickier than most people appreciate. The political incentives to maintain the status quo span the globe. And the only thing that genuinely threatens the arrangement is a shift in where the world’s most valuable companies are built — which is a technology question, not a currency question.

Maybe the permanent bid is permanent. Maybe it’s Japan 1989 with better PR. Either this is the most durable equilibrium in global finance, or it’s the most crowded trade in history — and I’m not sure those are different things. But betting against it requires a theory of where the money goes instead, and nobody has one.