How the transatlantic carry trade feeds on itself · An explainer with sources
Europe's households save more than they spend, and the surplus sails west into American stocks and bonds. Those inflows lift US asset prices. The paper wealth funds American shopping, and much of that shopping is done in China. China's factories, built on suppressed household spending, then flood Europe with cheap goods, which squeezes European wages and keeps Europe saving. Three loops, one machine.
US current-account deficit in 2025, equal to 3.6% of GDP. Its mirror image is capital flowing in.
BEA, Q4 2025 releaseUS net international investment position at end-2025: what the US owes abroad minus what it owns.
BEA, Q4 2025 releaseChina's goods trade surplus in 2025, a record, up from $992bn in 2024 despite US tariffs.
China customs via AP, Jan 2026Consumption as a share of China's GDP, against a global average of 76%.
Pettis, Carnegie ChinaEuro-area current-account surplus in 2025 (1.7% of GDP), down from €416bn (2.7%) in 2024.
ECB, 9 April 2026US shares as a portion of euro-area residents' holdings of non-euro-area equities.
Garnier, VoxEU, June 2026Loop 1 of 3 · The saver
Europe is a high-saving region with shallow capital markets. Households keep their money in bank deposits, firms find more growth abroad than at home, and the gap between what Europe produces and what it consumes leaves as a current-account surplus. In 2024 that surplus was €416bn, or 2.7% of euro-area GDP.
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Fragmented capital markets and slow growth leave European savings with few high-return outlets. The Draghi report puts Europe's investment gap at €750–800bn a year. Deposits make up about a third of euro-area household financial assets, and listed equities held by residents are worth 47% of GDP in France and 38% in Germany, against 214% in the US.
When demand at home is weak, growth has to come from abroad. Germany's current-account surplus reached almost 9% of GDP in 2016, built on cars, machinery and chemicals, with China as the fastest-growing customer. That surplus has since fallen to about 4.5%.
To keep exports priced to sell, labour costs are held down. Dustmann and co-authors trace Germany's turnaround from the “sick man of Europe” to decentralised wage bargaining from the mid-1990s, which let real wages at the bottom fall and cut unit labour costs relative to trading partners.
Klein and Pettis argue that a trade surplus is a story about distribution. When workers receive a smaller share of what they produce, they cannot buy it back. The unspent income becomes savings, the savings look for returns, and with few returns at home the loop starts again at step one.
Source: Garnier, VoxEU (2026). Total equity holdings, listed and unlisted: France 160%, Germany 126%, US about 320% of GDP.
Edge 1 · Europe → America
The surplus Europe does not invest at home is invested in the US. European investors hold around $8 trillion of US debt and equities. That is the carry trade in the subtitle: savings that earn little in euros are put to work in higher-yielding dollar assets.
Loop 2 of 3 · The absorber
The US sits at the other end of the pipe. A current-account deficit is the mirror image of capital flowing in: in 2025 the gap was $1.12 trillion, or 3.6% of GDP, and the US owed the rest of the world $27.54 trillion more than it owned abroad.
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Ben Bernanke's 2005 “global saving glut” lecture blamed excess foreign saving for the US deficit. Hyun Song Shin later showed that gross flows mattered as much as net ones: before 2008, European banks borrowed dollars in the US and used them to buy US mortgage securities, a transatlantic round trip that net figures miss.
Foreign money goes to the deepest, most liquid markets, which today means US technology. US shares make up nearly 60% of euro-area residents' holdings of non-euro-area equities, and the euro area's equity position against the US swung from about −3% of GDP in 2015 to +10% in 2025, mostly on US price gains. The Magnificent Seven alone were 22% of the MSCI World index by June 2025.
Higher asset prices make households feel richer, and they spend. Klein and Pettis argue that foreign capital flowing into the US has to show up somewhere as lower US saving: more household or government debt, asset bubbles, or higher unemployment.
Strong earnings and rising prices confirm the trade and draw in more foreign money. Gourinchas and Rey describe the US as the world's venture capitalist: it borrows safe and short, invests risky and long, and earns more on its assets than it pays on its debts.
Edge 2 · America → China
American spending, lifted by asset prices, leaks abroad as imports. The $1.12 trillion current-account deficit is the bill. Tariffs since 2025 have cut direct US purchases from China sharply, yet China's total surplus still grew as its exports found other markets.
Loop 3 of 3 · The builder
China closes the triangle. Its growth model channels household savings into industry, and output that Chinese consumers cannot absorb goes abroad. In 2025 its trade surplus came close to $1.2 trillion, up from $992bn the year before, despite US tariffs.
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Consumption is about 56% of China's GDP, against a global average of 76%. Michael Pettis argues the gap comes from policies that move income from households to producers: low deposit rates, a managed currency and wages that lag productivity.
After the property slump, credit that once went into apartments was redirected to factories. The IMF puts China's industrial subsidies at about 4.4% of GDP, roughly $800bn a year.
Capacity built for the world outruns what Chinese buyers can absorb. Export volumes have risen more than 40% since the pandemic while imports barely grew, and China's manufacturing surplus now runs at roughly $2 trillion.
The surplus goods have to go somewhere. As US tariffs cut shipments to America, exports were redirected to Europe, Southeast Asia and other markets. Chinese car exports to Europe rose 26% in 2025, to nearly 1.2 million vehicles.
Sources: China customs via AP (Jan 2026); manufacturing surplus estimate from Tordoir & Setser (2026).
Edge 3 · China → Europe
The goods America no longer takes land in Europe. Germany has lost about 3% of GDP in net exports since 2023 and more than 400,000 of the 1.1 million jobs that depended on Chinese demand in 2021. Pressure on factories becomes pressure on wages, and Europe goes back to saving.
Interactive · Illustrative model
Each corner feeds the next, so the loop multiplies. Pull any one lever and the whole machine slows. Every lever also has a price, which is why none has been pulled for long.
Lever sizes are illustrative, not estimates. Each lever weakens the edge leaving its corner, and loop strength is the product of the three edges.
Counterpoints
The triangle is a strong frame, not a settled fact. Recent data and research push back on parts of it.
In 2025, net equity flows into the euro area were inward, at −€280bn, and the surplus was recycled mostly through direct investment. Garnier argues Europe's problem is how savers allocate at home (too much in deposits, too little in equities), not capital flight.
The euro-area surplus fell from €416bn to €276bn in 2025, and the euro area ran a €57bn current-account deficit with the US. Tordoir notes that once Ireland's tax-driven figures are excluded, the eurozone surplus has effectively vanished, helped by German fiscal expansion and a stronger euro.
Bernanke's saving glut is about net flows. Shin's banking glut is about gross flows: European banks financed US asset prices before 2008 while Europe ran roughly balanced accounts with the US. If gross flows dominate, the loop is a leverage story, and a shrinking surplus does not stop it.
On this reading the second China shock, not transatlantic trade, is the distortion that matters. The IMF estimates the renminbi is 16% undervalued, and the authors suggest the true figure may be closer to 30%. The fix runs through Chinese consumption and a coordinated Western response.
Literature and data
The founding text: foreign excess saving, not US profligacy alone, drives the US deficit.
Why the US earns more on its foreign assets than it pays on its liabilities.
Europe, not only surplus Asia, was a heavy buyer of risky US asset-backed securities before 2008.
Gross flows through European banks, not net savings, loosened US credit conditions.
The first China shock, measured in lost US manufacturing jobs. The template for reading today's European version.
How policies that suppress household income in one country create imbalances in others.
Decentralised wage bargaining and wage restraint behind Germany's export model.
The core of the triangle: surpluses in Germany and China as the result of inequality, absorbed by US deficits.
A €750–800bn annual investment gap and the case for keeping European savings at home.
Consumption at 56% of GDP against 76% globally, and why rebalancing caps growth.
$8 trillion of European holdings of US assets, and why the transatlantic link cannot be unwound.
German jobs and output lost to the second China shock; subsidies, renminbi and the $2 trillion manufacturing surplus.
The strongest counterpoint: flows into euro-area equities were net inward in 2025.
Current account, investment position, and the US share of euro-area foreign holdings.
A $1.12 trillion current-account deficit and a −$27.54 trillion net position.
China's customs data for 2025, with shipments redirected away from the US.
The Magnificent Seven at 22% of MSCI World by June 2025.
The diagram this page is built on.