What are the causes and consequences of the current US account deficit?

Résumé du document

Few economic issues have recently posed as many problems to authorities and economists than the U.S. current account deficit. It has become an issue that is receiving more and more attention and it is now considered as a "hot topic". Some fear that it represents a time bomb for the global economy. The current account is part of the Balance of Payments and it is the net flow of current transactions, including goods, services, and interest payments between countries. A country's current account is very important because it measures the size and direction of international borrowing. There is a current account deficit when a country imports more goods and services than it exports, or when a country invests less than it saves. The U.S. current account deficit is substantial. In 2005 it exceeded 800 billion dollars, that is to say 6.4 % of the U.S. GDP (Growth Domestic Product). This represents roughly 1.5 % of the world's GDP. This huge deficit is not new. Indeed, there were already advance indications in the 1980s, in particular since domestic spending began to grow faster than the economy in the U.S.

Extraits

[...] What are the Causes of the US Current Account Deficit? According to Roger W. Ferguson, Jr., the vice-chairman on the Board of Governors of the U.S. Federal Reserve, no single factor constitutes a dominant explanation of the deterioration of the US current account balance and there are many causes to look at. From A Domestic Perspective The first thing to look at is the expansion of the budget deficit. It is the difference between the government's total expenditure and its total receipts. [...]

[...] Whenever the interest rates increase, the dollar appreciates. This appreciation of the dollar makes imports cheaper in terms of dollars and exports more expensive in terms of foreign currencies, which leads to a current account deficit. However, the rise in interest rates also leads to much lower investment spending. So if the fall in private saving seems to have a great impact on net exports it is important to notice that it has a greater impact on investment spending, thus leading to little change in the Balance of Payments. [...]

[...] However, the Fed is to announce a reduction in the interest rates which is going to have a great impact on the U.S. current account and its economy since the investors might not keep on investing in the U.S. but in other countries where interest rates are higher. References Krugman/Obstfeld, Chapter 12: National Income Accounting and the Balance of Payments Mann (2002) Perspectives on the U.S. Current Account Deficit and Sustainability. The Journal of Economic Perspectives 131-152. Ferguson (2005) U.S. Current Account Deficit: Causes and Consequences. Economics Club of the University of North Carolina. Chapel Hill, North Carolina. April 20, 2005. [...]

[...] consumption and investment have grown faster than U.S. output, and foreigners have lent funds for imports to fill the gap. Equivalently, U.S. investment increasingly exceeds U.S. savings It is important to note that this huge deficit has consequences. What are the Consequences of the US Current Account Deficit? Concerning the U.S. current account deficit, it is important to note that it represents risks and thus that it is not without consequences. The risks and consequences concern both the international finance and the domestic economy. [...]

[...] will not be able to pay, they might all want to sell their U.S. assets because they seem to risky. This would lead to a flight for liquidity, which is when investors sell what they percieve to be less liquid or of higher risk. This is today possible because of the efficiency of the market; it is large and liquid but this also allows drastic changes in interest and exchange rates. Flight to liquidity usually results in panic, leading to a crisis. [...]