Financial Dutch Disease
America has financial Dutch disease.
American indices are hitting all-time highs and SpaceX’ monster IPO was successful while American cars are terrible compared to those produced by other industrial economies, almost all advanced computer chips being produced in Asia, and industrial policy and tariffs are in vogue in Washington. There is a clear disconnect between finance and the real economy. My model for explaining this discrepancy is Dutch disease, more specifically I posit the hypothesis that the US has Dutch disease in its financial sector.
It is surprisingly difficult to find statistics on how much the financial sector contributes to an economy’s GDP. While there is lots of data on growth rates, the split between services, industry, and agriculture, and arbitrary measures like the IMF’s “AI preparedness index” I could not find a reliable internationally comparable statistic for how large the finance sector in a given country is. This means that what I posit in this post is unsubstantiated, with a call to any statistics whiz or macro economist to fact check and email me the results. But enough caveats, let’s discuss Dutch disease.
Dutch disease is a term coined in the 1970’s by The Economist to describe the Dutch economy’s problems after the discovery of North Sea natural gas. The export of gas drove up the value of the guilder which meant that other export sectors became uncompetitive, harming industrial manufacturing especially. It is most intuitive to diagnose an economy with Dutch disease when it is reliant on energy, or other commodity exports, but there is no reason it cannot exhibit a similar dynamic in a non-commodity sector. All that really matter is that an export sector is so dominant that the currency responds to that sector’s needs rather than the needs of the broader economy.
With a definition out of the way, let’s get to the meat of the argument: that America has Dutch disease in its finance sector. As explained, I’ve not been able to find data which could confirm or refute this hypothesis. The idea is that American public debt markets are the largest and most liquid in the world, while at the same time American equities tend to outperform other stock markets. Add the fact that America is world leading in alternative assets like venture capital, private equity, and private credit which are all mythologised to be better performers than the general equity market and you see why American finance could be uniquely enticing for foreign investors.
Of course, finance is a very different type of sector than energy, and it may seem counterintuitive to describe foreign portfolio investments as an export. But if we ignore the fact that equities and shares in funds stay in America, it is an export in the sense of a foreigner having to convert their local currency into dollars to buy it. This is the operational mechanism of Dutch disease, that a throng of gas importers line up to convert their currencies to guilders to which prices out importers of other Dutch products.
According to the latest Big Mac index – The Economist’s measure of whether or not a currency is under or overvalued by using a standardised product – the US dollar was overvalued by 67.1% compared to the Chinese yuan. This is not conclusive proof, the dollar was undervalued compared to the Euro and the Pound (and overvalued compared to the yen), but it is at least one data point which can be checked, and one which supports my hypothesis at that.
Let’s move on from the hypothesis itself to the arguably more interesting larger context. How can the US have financial Dutch disease? The financial sector is meant to be a facilitator rather than a producer, and equity markets are supposed to be reflections of the real economy. Of all the sectors in an economy, the finance sector makes the least sense to be the cause for Dutch disease. There are two answers to this conundrum, one on the debt side, and one on the equity side.
Firstly, American treasuries continue to act as a bottomless pit for foreign capital. The federal government borrows incredible sums of money, and only ever repays the principals it owes with other lenders’ money. The US has run a budget deficit since 2002 and there is nothing to suggest that it will become more prudent any time soon; indeed the trend is towards increasing deficits from an already high base of $1.78 trillion in fiscal 2025. It is unclear what the split is between foreign and domestic lenders for plugging the enormous holes in the federal budget, but it is safe to say that there is a lot of space for foreign investors to buy American bonds.
Secondly, one of the themes of the American stock market since the nadir of the Great Recession is multiple expansion. If the value of equities as a concept increases or the discount rate for future cash flows decreases then the valuation of a share or shares in general can increase without any material changes to the economic outlook. And as always with financial markets there is an element of reflexivity: if the American markets outperform there will be more investors interested in allocating their capital to America which means more money chasing the same shares which drives up valuations in a virtuous cycle.
Taken together, there is a lot of financial assets to buy in the US and given just how important American markets are to global markets – consider the way most “global” mutual funds actually mostly invest in the US for example – it is reasonable to assume that the demand for American assets has a significant impact on US exchange rates. And again, there is an element of reflexivity here, as an appreciating dollar further increases American outperformance, or mitigates American underperformance compared to domestic markets.
If my hypothesis is correct, then you would expect non-finance export sectors to struggle in the US, and without having done any sort of academically rigorous research on this, it seems intuitively true. Cars, chips, and aeroplanes are all industrial goods the US used to be world beating in which it now struggles to compete with European and Asian rivals. The kinds of infrastructure one can “export” like railways, ports, and nuclear reactors are largely built by Chinese and Russian rather than American companies. And American agricultural exports are losing grounds to the likes of Brazil.
The accepted common-sense narrative about de-industrialisation in the US blames China or in more nuanced accounts the politicians who allowed China into the warmth of the WTO and the global trading order. And while it is true that China is a prodigious student in the art of industrial manufacturing, complex socio-economic issues can have more than one contributing cause. Perhaps a more balanced economy would have been better suited to dealing with the challenges of the China shock.
Ultimately the reason why the industrial revolution, and later industrialisations like the reform and opening period in China and the Meiji restoration era in Japan was able to produce prosperity and consistent gains in productivity was that industrial processes beget more industry. Getting coal to power steam engines to more efficiently dig up coal makes energy cheaper and makes any manufacturing which requires coal and by extension steel cheaper. Suddenly high-end materials become affordable enough to reach mass adoption which enables more complex and powerful machines, and larger and especially taller buildings. Industrialisation is a positive feedback loop because outputs from one factory becomes inputs to another factory which produces products which make the first factory more efficient.
Finance is a qualitatively different sector than industry and agriculture in the sense that its outputs can only ever facilitate improvements rather than directly cause them. And the modern American financial sector tend to produce outputs which, while immensely profitable, are not actually productive, those being valuations and hype. In that sense financial Dutch disease is markedly worse than energy or raw material Dutch disease; at least Dutch disease from natural gas can lead to lower energy prices.
Another issue for America is that it has not realised that it has Dutch disease and therefore not realised that the gains from its extraordinary sector should be taxed, redistributed, or used to form a sovereign wealth fund. Any policy aimed at restoring American manufacturing will struggle as long as the imbalance of financial overperformance remains. To take push the hypothesis further, in the AI mania era it seems that there is a financial outperformance even in financial markets which further hampers non-financial sectors of the American economy.
It seems that investing in shares in companies which build AI data centres is more profitable than building and running those data centres, and this is a theme in American finance. It is clearly more profitable to invest in Tesla than to run Tesla, and it is a far better business to buy and sell shares in SpaceX than to launch rockets and host satellite internet. To once again quote one of my favourite statistics, in November 2025 Joe Bae, KKR’s co-CEO, said that there are more private equity firms in North America than there are McDonalds franchises. Clearly, the business of buying, selling, and owning businesses is better than running an actual business. Imagine what that does to an economy. If private equity is more profitable than running the types of businesses private equity firms buy, then by extension isn’t it also a better business to lend to the financial economy than the real economy?
Again, I don’t know how to find the data which would be needed to disprove this hypothesis, and while the absence of evidence is not evidence of absence, but in this situation a reminder of my limits as an amateur economist. That being said, perhaps this hypothesis will give readers a new perspective, and if you happen to have or know how to acquire the data required to test this hypothesis, please do get in touch.
But until someone finds a way to disprove this hypothesis I put this forward as the best current explanation for how America can be so financially successful while struggling industrially.
If you liked this post you can read a previous post about finance here or the rest of my writings here. I also have a section for longer reads I call essays here, I particularly recommend my series called The Bird & The Technoking exploring Elon Musk's takeover of Twitter, and its political and cultural implications. It'd mean a lot to me if you recommended the blog to a friend or coworker. Come back next Monday for a new post!
I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson
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Cover photo by Patrick Gamelkoorn from Pexels, edited by Karl Johansson
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