Can the United States Continue to Run Current Account Deficits Indefinitely?

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Can the United States Continue to Run Current Account Deficits Indefinitely?

Can the United States Continue to Run Current Account Deficits Indefinitely?
The United States has benefitted from a surplus of saving over investment in many areas of the
world that has provided a supply of funds. This surplus of saving has been available to the
United States because foreigners have remained willing to loan that saving to the United States
in the form of acquiring U.S. assets such as Treasury securities that have accommodated the
current account deficits. During the 1990s and the first decade of the 2000s, the United States
experienced a decline in its rate of savings and an increase in the rate of domestic investment.
The large increase in the U.S. current account deficit would not have been possible without the
accommodating inflows of foreign capital coming from nations with high savings rates such as
Japan and China. China is a major supplier of capital to the United States. This is partly because
of China’s exchange rate policy of keeping the value of its yuan low (cheap) so as to export
goods to the United States and thus create jobs for its workers (see Chapter 15). In order to offset
a rise in the value of the yuan against the dollar, the central bank of China has purchased dollars
with yuan. Rather than hold dollars that earn no interest, China’s central bank has converted
much of its dollar holdings into U.S. securities that pay interest. This situation has put the United
States in a unique position to benefit from the willingness of China to finance its current account
deficit. The United States can “print money” that the Chinese hold in order to finance its excess
spending. The buildup of China’s dollar reserves helps support the U.S. stock and bond markets
and permits the U.S. government to incur expenditure increases and tax reductions without
increases in domestic U.S. interest rates that would otherwise take place. Some analysts are
concerned that at some point Chinese investors may view the increasing level of U.S. foreign
debt as
International Economics unsustainable or more risky and suddenly shift their capital elsewhere.
They also express concern that the United States will become more politically reliant on China
who might use its large holdings of U.S. securities as leverage against policies it opposes. Can
the United States run current account deficits indefinitely and rely on inflows of foreign capital?
Since the current account deficit arises mainly because foreigners desire to purchase American
assets, there is no economic reason why it cannot continue indefinitely. As long as the
investment opportunities are large enough to provide foreign investors with competitive rates of
return, they will be happy to continue supplying funds to the United States. There is no reason
why the process cannot continue indefinitely: No automatic forces will cause either a current
account deficit or a current account surplus to reverse. U.S. history illustrates this point. From
1820 to 1875, the United States ran current account deficits almost continuously. At this time,
the United States was a relatively poor (by European standards) but rapidly growing country.
Foreign investment helped foster that growth. This situation changed after World War I. The
United States was richer and investment opportunities were more limited. Current account
surpluses were present almost continuously between 1920 and 1970. During the last 40 years, the
situation has again reversed. The current account deficits of the United States are underlain by its
system of secure property rights, a stable political and monetary environment, and a rapidly
growing labor force (compared with Japan and Europe), which make the United States an

attractive place to invest. Moreover, the U.S. saving rate is low compared to its major trading
partners. The U.S. current account deficit reflects this combination of factors, and it is likely to
continue as long as they are present. Simply put, the U.S. current account deficit has reflected a
surplus of good investment opportunities in the United States and a deficit of growth prospects
elsewhere in the world. Some economists think that because of spreading globalization, the pool
of savings offered to the United States by world financial markets is deeper and more liquid than
ever. This pool allows foreign investors to continue furnishing the United States with the money
it needs without demanding higher interest rates in return. Presumably, a current account deficit
of 6 percent or more of GDP would not have been readily fundable several decades ago. The
ability to move so much of world saving to the United States in response to relative rates of
return would have been hindered by a far lower degree of international financial
interdependence. In recent years, the increasing integration of financial markets has created an
expanding class of foreigners who are willing and able to invest in the United States. The
consequence of a current account deficit is a growing foreign ownership of the capital stock of
the United States and a rising fraction of U.S. income that must be diverted overseas in the form
of interest and dividends to foreigners. A serious problem could emerge if foreigners lose
confidence in the ability of the United States to generate the resources necessary to repay the
funds borrowed from abroad. As a result, suppose that foreigners decide to reduce the fraction of
their saving that they send to the United States. The initial effect could be both a sudden and
large decline in the value of the dollar as the supply of dollars increases on the foreign exchange
market and a sudden and large increase in U.S. interest rates as an important source of saving
was withdrawn from financial markets. Large increases in interest rates could cause problems for
the U.S. economy as they reduce the market value of debt securities, causing prices on the stock
market to decline, and raising questions about the solvency of various debtors. Whether the
United States can sustain its current account deficit over the foreseeable future depends on
whether foreigners are willing to increase their investments in U.S. assets.
The current account deficit puts the economic fortunes of the United States partially in the hands
of foreign investors. The economy’s ability to cope with big current account deficits depends on
continued improvements in efficiency and technology. If the economy becomes more productive,
then its real wealth may grow fast enough to cover its debt. Optimists note that robust increases
in U.S. productivity in recent years have made its current account deficits affordable. If
productivity growth stalls, the economy’s ability to cope with current account deficits will
deteriorate. Although the appropriate level of the U.S. current account deficit is difficult to
assess, at least two principles are relevant should it prove necessary to reduce the deficit. First,
the United States has an interest in policies that stimulate foreign growth, because it is better to
reduce the current account deficit through faster growth abroad than through slower growth at
home. A recession at home would obviously be a highly undesirable means of reducing the
deficit. Second, any reductions in the deficit are better achieved through increased national
saving than through reduced domestic investment. If there are attractive investment opportunities
in the United States, we are better off borrowing from abroad to finance these opportunities than
forgoing them. On the other hand, incomes in this country would be even higher in the future if

these investments were financed through higher national saving. Increases in national saving
allow interest rates to remain lower than they would otherwise be. Lower interest rates lead to
higher domestic investment that in turn boosts demand for equipment and construction. For any
given level of investment, increased saving also results in higher net exports that would again
increase employment in these sectors. Shrinking the U.S. current account deficit can be difficult.
The economies of foreign nations may not be strong enough to absorb additional American
exports, and Americans may be reluctant to curb their appetite for foreign goods. The U.S.
government has shown a bias toward deficit spending. Turning around a deficit is associated
with a sizable fall in the exchange rate and a decrease in output in the adjusting country, topics
that will be discussed in subsequent chapters.

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Can the United States Continue to Run Current Account Deficits Indefinitely?

 

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Can the United States Continue to Run Current Account Deficits Indefinitely?

Can the United States Continue to Run Current Account Deficits Indefinitely?
The United States has benefitted from a surplus of saving over investment in many areas of the
world that has provided a supply of funds. This surplus of saving has been available to the
United States because foreigners have remained willing to loan that saving to the United States
in the form of acquiring U.S. assets such as Treasury securities that have accommodated the
current account deficits. During the 1990s and the first decade of the 2000s, the United States
experienced a decline in its rate of savings and an increase in the rate of domestic investment.
The large increase in the U.S. current account deficit would not have been possible without the
accommodating inflows of foreign capital coming from nations with high savings rates such as
Japan and China. China is a major supplier of capital to the United States. This is partly because
of China’s exchange rate policy of keeping the value of its yuan low (cheap) so as to export
goods to the United States and thus create jobs for its workers (see Chapter 15). In order to offset
a rise in the value of the yuan against the dollar, the central bank of China has purchased dollars
with yuan. Rather than hold dollars that earn no interest, China’s central bank has converted
much of its dollar holdings into U.S. securities that pay interest. This situation has put the United
States in a unique position to benefit from the willingness of China to finance its current account
deficit. The United States can “print money” that the Chinese hold in order to finance its excess
spending. The buildup of China’s dollar reserves helps support the U.S. stock and bond markets
and permits the U.S. government to incur expenditure increases and tax reductions without
increases in domestic U.S. interest rates that would otherwise take place. Some analysts are
concerned that at some point Chinese investors may view the increasing level of U.S. foreign
debt as
International Economics unsustainable or more risky and suddenly shift their capital elsewhere.
They also express concern that the United States will become more politically reliant on China
who might use its large holdings of U.S. securities as leverage against policies it opposes. Can
the United States run current account deficits indefinitely and rely on inflows of foreign capital?
Since the current account deficit arises mainly because foreigners desire to purchase American
assets, there is no economic reason why it cannot continue indefinitely. As long as the
investment opportunities are large enough to provide foreign investors with competitive rates of
return, they will be happy to continue supplying funds to the United States. There is no reason
why the process cannot continue indefinitely: No automatic forces will cause either a current
account deficit or a current account surplus to reverse. U.S. history illustrates this point. From
1820 to 1875, the United States ran current account deficits almost continuously. At this time,
the United States was a relatively poor (by European standards) but rapidly growing country.
Foreign investment helped foster that growth. This situation changed after World War I. The
United States was richer and investment opportunities were more limited. Current account
surpluses were present almost continuously between 1920 and 1970. During the last 40 years, the
situation has again reversed. The current account deficits of the United States are underlain by its
system of secure property rights, a stable political and monetary environment, and a rapidly
growing labor force (compared with Japan and Europe), which make the United States an

attractive place to invest. Moreover, the U.S. saving rate is low compared to its major trading
partners. The U.S. current account deficit reflects this combination of factors, and it is likely to
continue as long as they are present. Simply put, the U.S. current account deficit has reflected a
surplus of good investment opportunities in the United States and a deficit of growth prospects
elsewhere in the world. Some economists think that because of spreading globalization, the pool
of savings offered to the United States by world financial markets is deeper and more liquid than
ever. This pool allows foreign investors to continue furnishing the United States with the money
it needs without demanding higher interest rates in return. Presumably, a current account deficit
of 6 percent or more of GDP would not have been readily fundable several decades ago. The
ability to move so much of world saving to the United States in response to relative rates of
return would have been hindered by a far lower degree of international financial
interdependence. In recent years, the increasing integration of financial markets has created an
expanding class of foreigners who are willing and able to invest in the United States. The
consequence of a current account deficit is a growing foreign ownership of the capital stock of
the United States and a rising fraction of U.S. income that must be diverted overseas in the form
of interest and dividends to foreigners. A serious problem could emerge if foreigners lose
confidence in the ability of the United States to generate the resources necessary to repay the
funds borrowed from abroad. As a result, suppose that foreigners decide to reduce the fraction of
their saving that they send to the United States. The initial effect could be both a sudden and
large decline in the value of the dollar as the supply of dollars increases on the foreign exchange
market and a sudden and large increase in U.S. interest rates as an important source of saving
was withdrawn from financial markets. Large increases in interest rates could cause problems for
the U.S. economy as they reduce the market value of debt securities, causing prices on the stock
market to decline, and raising questions about the solvency of various debtors. Whether the
United States can sustain its current account deficit over the foreseeable future depends on
whether foreigners are willing to increase their investments in U.S. assets.
The current account deficit puts the economic fortunes of the United States partially in the hands
of foreign investors. The economy’s ability to cope with big current account deficits depends on
continued improvements in efficiency and technology. If the economy becomes more productive,
then its real wealth may grow fast enough to cover its debt. Optimists note that robust increases
in U.S. productivity in recent years have made its current account deficits affordable. If
productivity growth stalls, the economy’s ability to cope with current account deficits will
deteriorate. Although the appropriate level of the U.S. current account deficit is difficult to
assess, at least two principles are relevant should it prove necessary to reduce the deficit. First,
the United States has an interest in policies that stimulate foreign growth, because it is better to
reduce the current account deficit through faster growth abroad than through slower growth at
home. A recession at home would obviously be a highly undesirable means of reducing the
deficit. Second, any reductions in the deficit are better achieved through increased national
saving than through reduced domestic investment. If there are attractive investment opportunities
in the United States, we are better off borrowing from abroad to finance these opportunities than
forgoing them. On the other hand, incomes in this country would be even higher in the future if

these investments were financed through higher national saving. Increases in national saving
allow interest rates to remain lower than they would otherwise be. Lower interest rates lead to
higher domestic investment that in turn boosts demand for equipment and construction. For any
given level of investment, increased saving also results in higher net exports that would again
increase employment in these sectors. Shrinking the U.S. current account deficit can be difficult.
The economies of foreign nations may not be strong enough to absorb additional American
exports, and Americans may be reluctant to curb their appetite for foreign goods. The U.S.
government has shown a bias toward deficit spending. Turning around a deficit is associated
with a sizable fall in the exchange rate and a decrease in output in the adjusting country, topics
that will be discussed in subsequent chapters.

The post Can the United States Continue to Run Current Account Deficits Indefinitely? appeared first on Best Custom Essay Writing Services | ourWebsite.

Can the United States Continue to Run Current Account Deficits Indefinitely?