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

Résumé du document

Recently, economists have been focusing much of their attention on a particular issue which seems to be a cause for concern in many countries, namely the US current account deficit. The current account is, along with the financial account and the capital account, part of a country's Balance of Payments, a document recording this country's international trade in goods and services and its international borrowing and lending. The current account consists of three elements (the trade account, the income account and the transfer account), but it is commonly defined as the difference between a country's exports and its imports. A current account deficit thus means that a country imports more than it exports. This has been the case for the United States for several periods in its history, including the past fifteen years, the US current account deficit has indeed grown steadily since 1991 and this situation has been raising much concern lately, probably because the deficit had never reached such a level before. The US current account deficit represents today about 800 billion dollars, that is to say nearly 7% of the US Gross Domestic Product. Economists thus fear the possible consequences (in the United States but also in the whole world) of such a deficit in the world's most powerful economy and therefore try to suggest possible solutions. And the best way to find solutions to a problem is to first identify the causes for it. I will put forward some hypotheses concerning the causes for the increase in the US current account deficit in the first part, and identify the possible consequences of such a phenomenon in the second part.

Extraits

[...] Ferguson (2005), U.S. Current Account Deficit: Causes and Consequences. Ben S. Bernanke (2005), The Global Saving Glut and the U.S. Current Account Deficit. Jill A. Holman (2001), Is The Large U.S. Current Account Deficit Sustainable? Bernanke (2005), The Global Saving Glut and the U.S. [...]

[...] In any case, the deficit cannot widen forever and, sooner or later, an adjustment will have to occur to turn the deficit into a surplus. In this day and age, we cannot predict which scenario of adjustment is more likely to happen: a gradual correction or an abrupt, painful adjustment. Let's hope, for the whole world's economy, that the first option will prevail. Bibliography Paul R. Krugman/ Maurice Obstfeld, Chapter 12: National Income Accounting and the Balance of Payments Catherine L. Mann (2002), Perspectives on the U.S. Current Account Deficit and Sustainability. Roger W. [...]

[...] According to this point of view, the fiscal deficit that the United States have been running for a while (especially in the early 1990s, when the current account deficit also started to widen) has to be blamed for the huge current account deficit. In this version of the story, a larger fiscal deficit (created by an expansionary fiscal policy) boosts domestic demand, thus increasing domestic interest rates relative to foreign interest rates, due to the increase in the money demand. Since higher interest rates attract foreign investors, the value of the dollar rises, making imports cheaper but exports more expensive. As a consequence, the country experiences a larger current account deficit. [...]

[...] What are the Causes and Consequences of the US Current Account Deficit? The causes of the US current account deficit 3 Internal reasons 3 External reasons 4 II) The consequences of the US Current Account deficit 5 Risks linked with a large current account deficit 5 The case of a gradual correction 5 The case of an abrupt adjustment 6 Bibliography 6 Recently, economists have been focusing much of their attention on a particular issue which seems to be a cause for concern in many countries, namely the US current account deficit. [...]

[...] Indeed, we have to keep in mind that interest rates and exchange rates adjusted gradually, allowing the effects of these changes to be trivial compared to other macroeconomic forces that affect economy. This would be an ideal scenario The case of an abrupt adjustment Unfortunately, another scenario, much more problematic than the first one, is plausible. This other possibility is that of a sudden and abrupt adjustment. In concrete terms, this situation would mean that investors suddenly stop buying US assets, or even sell them. Recently, The Financial Times described the likely consequences of an abrupt U.S. [...]