Hi! Thanks for an interesting question.
I will provide you with small snippets from the some of the articles I
will cite so as to save you time. But I highly recommend that you read
them in their entirety to get a better grasp of the concepts.
Whenever you talk about the current account deficit in the US, you
will have varying views from different economists.
Before we go on with the different analysis of economists and also the
perspectives within this answer, let us first have a basic idea of
what the current account is and what its general effects are in order
to aid our flow of discussion.
?In the current account, goods, services, income, and current
transfers are recorded.?
?A deficit reflects an economy that is a net debtor to the rest of the
world. It is investing more than it is saving and is using resources
from other economies to meet its domestic consumption and investment
requirements.?
What are the effects of a current account deficit?
?A current account deficit is usually accompanied by depletion in
foreign-exchange assets because those reserves would be used for
investment abroad. The deficit could also signify increased foreign
investment in the local market, in which case the local economy is
liable to pay the foreign economy investment income in the future.?
?Understanding the Current Account in the Balance of Payments? (Investopedia)
://www.google.as/search?q=cache:LxMjdZo_48sJ:www.investopedia.com/articles/03/061803.asp+effects+%22current+account%22+deficit+2004&hl=en
A more detailed look at the different perspectives on the nature of
the current account deficit in the US can be gleaned from our next
resource from the National Bureau of Economic Research.
a. Americans are greedy about capital from other countries that is why
there is a deficit.
?The Economist in a recent issue headlined its view of ?America?s
borrowing binge? as ?profligacy.? In this perspective, Americans
selfishly absorb capital that the capital-poor rest of the world could
use to better advantage.?
b. America is a safe haven for foreign investments.
?An alternative key to understanding why the U.S. current account is
in deficit is to focus on what motivates non-Americans to acquire ever
larger holdings (with few reversals) of US firms, property, stocks and
bonds, bank loans, Treasury securities and US currency. The obvious
answer is the US reputation as a safe haven even after 9-11??
c. ?The US is one of the geographical areas and is the center country
of the global economy. It is the system?s financial intermediary. It
does not manage its exchange rate and does not accumulate foreign
reserves. It is both a trade account and a capital account country.?
d. ?One consequence of the inflow of funds from abroad is that the
dollar has been a strong currency in foreign exchange markets, with
the effect of bolstering imports of goods and services. Complaints
about unfair trade practices of foreign exporters are not unique to
the present. Subsidies to agriculture to promote US crop exports have
been a perennial feature of protectionist trade policy.?
?INTERPRETING THE U.S. CURRENT ACCOUNT DEFICIT? (National Bureau of
Economic Research)
http://www.somc.rochester.edu/Nov03/schwartz.pdf
Another detailed academic paper this time from the Journal of Economic
Perspectives also provides other dimensions of viewing the US current
account deficit.
?This essay considers the underpinnings of the large U.S. current
account deficit. It then tackles the question of whether the U.S.
current account deficit is sustainable. A current account deficit is
?sustainable? at a point in time if neither it, nor the associated
foreign capital inflows, nor the negative net international investment
position are large enough to induce significant changes in economic
variables, such as consumption or investment or interest rates or
exchange rates. Even if the current account deficit is sustainable by
this definition today, its trajectory could still be creating future
risks for the U.S. and global economy.?
?Perspectives on the U.S. Current Account Deficit and Sustainability?
http://www.iie.com/publications/papers/mann0903.pdf
------------------------
But with this huge US current deficit, do we really have a problem?
Some say it is and others say no. Let us look first at those who say
that the current account deficit isn?t a real problem.
Herbert Stein subscribes to the thought that a US current account
deficit isn?t a problem at all.
?Contrary to the general perception, the existence of a current
account deficit is not, in itself, a sign of bad economic policy or of
bad economic conditions. If the United States has a current account
deficit, all this means is that the United States is importing
capital. And importing capital is no more unnatural or dangerous than
importing coffee. The deficit is a response to conditions in the
country. It may be a response to excessive inflation, to low
productivity, or to inadequate saving. It may just as easily occur
because investments in the United States are secure and profitable.?
?During the eighties there was a great deal of concern about the shift
of the U.S. current account balance from a surplus of $8 billion in
1981 to a deficit of $147 billion in 1987. This shift was accompanied
by an increase of about the same amount in the U.S. deficit in goods.
A common claim was that this shift in the international position was
causing a loss of employment in the United States. But that was not
true. In fact, between 1981 and 1987, the number of people employed
rose by over 12 million, and employment as a percent of population
rose from 60 percent to 62.5 percent.?
?Balance of Payments? (The Concise Encyclopedia of Economics)
http://www.econlib.org/library/Enc/BalanceofPayments.html
FED Chief Allan Greenspan also feels that the deficit is not really a problem.
?But for America the gallows do not beckon yet, according to a recent
speech* by Alan Greenspan, the chairman of the Federal Reserve, at a
conference sponsored by The Economist and the Cato Institute.
Admittedly, Americans' demands on the world's savings are greater than
ever. But Mr. Greenspan argues that, thanks to spreading
globalisation, the pool of savings on offer in today's global capital
markets is deeper and more liquid than ever. The markets continue to
furnish America with the money it needs without demanding higher
yields in return.?
?Stop worrying and love the deficit? (The Economist)
http://www.economist.com/finance/displayStory.cfm?story_id=2245930
?The chairman said he was quite optimistic that there would not be a
dollar crisis because individual economies were more flexible than in
the past, and ?inflation, the typical symptom of a weak currency,
appears quiescent?.?
?Few problems with record deficit: Greenspan? (The Age)
http://www.theage.com.au/articles/2004/01/14/1073877899479.html?from=storyrhs&oneclick=true
--------------------------------
We will now take a look at the reasons why some economists worry that
such a big deficit will affect both US and the global economy as well.
?The process is all too familiar. A country starts to grow at a torrid
pace, this spurs consumption and borrowing and an influx of investment
from abroad. The currency soars. Pretty soon the country is borrowing
beyond its means and a great chasm opens up between domestic savings
and investment.?
?The United States is not an emerging market, of course, but its
adjustment in the 1980s was sharp nonetheless.?
?The deficit reached a peak of 3.5% but a few short years later it had
vanished, thanks to a recession, a 40% depreciation in the greenback
and the rise of Japan Inc., which became the new investment
destination of choice.?
?U.S. current account deficit last big bubble? (The National Post)
http://209.157.64.200/focus/f-news/941971/posts
?The whopping U.S. trade deficit reflects the shortfall in production.
The required inflow of foreign capital, which finances the trade
deficit, reflects the shortage of savings.?
?The situation worsened because U.S. economic growth consistently
outstripped that of other industrial nations, creating much stronger
demand for imports in the U.S. than demand for American-made goods in
other countries.?
?Another factor is that the large current account deficits mean that
the net U.S. international investment position is rapidly getting
worse. So the amount of income foreign investors are owed on their
dollar-denominated assets will be rising, too.?
?Current Account Deficit Poses Serious Risks? (Bloomberg)
http://quote.bloomberg.com/apps/news?pid=10000039&sid=az8ywcXba0.M&refer=columnist_berry
?Many private economists worry that if foreigners suddenly should
become spooked and start dumping their U.S. holdings, stock prices
could plunge and interest rates soar.?
?Current Account Deficit Reaches $144.9B? (Forbes)
http://www.forbes.com/home/feeds/ap/2004/06/18/ap1422501.html
?US and European economists worry that huge current account and budget
deficits in the United States have made the US economy dependent on
capital inflows. If such funds were to be interrupted, they warn, US
interest rates could rise sharply, dampening growth worldwide.?
?IMF head appeals to US to cut deficits, urges Japan, EU to
restructure? (Keep Media)
http://www.keepmedia.com/pubs/AFP/2004/06/14/487445?from=search
--------------------------
In my opinion the US, domestically, does not really have a problem
with its current deficit. Sure it may feel the effects on the
deficit?s burden on the dollar but as a whole since the US is the
center of the global economy, it will balance out for them in the long
run. But I do feel that it will have repercussions to the global
economy.
As Americans spend more and the current deficit grows Asian countries
will be happy since they are a trading region. Exports are the
lifeblood of most Asian countries so it will benefit them. If the US
however, responds with protectionism then it will be a big problem for
the Asian region. Europe meanwhile was described by one of our
resources as a capital account region. Since they are the ones
providing capital in the US then they are concerned with the
fluctuations of the dollar and their exposure to US domestic economic
forces.
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Easterangel-ga
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