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Deficits and financial dependence of the United States

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  1. A required change
    1. An inventory of current systems
    2. Leading to new accounting philosophy
  2. The many impacts on the accounts
    1. The priority of the new IFRS balance sheet and the front line assets
    2. Liabilities and income statements
  3. Varied consequences
    1. Advantages for some companies...
    2. Necessity to minimize the possible secondary consequences

Among the most popular platitudes, the U.S. deficits occupy a prominent place. In terms of the coffee trade, one would like to think that the situation is dramatic and that one should expect an earthquake in the financial world. Given the downward trend in the current account, this concern seems justified. In recent years, deficits are such that the dependence vis-a-vis other countries is inevitable. The current account is in deficit since 1992, and the pace of deterioration has accelerated as will be seen in the graph. The current account records all economic transactions resulting from international trade in goods and services, income and current transfers. A negative current account reflects the fact that the United States have to live beyond their means. It is therefore necessary to finance the deficit, and to appeal to the world. This financial dependence is even greater than domestic savings and does not finance domestic investment.

So far, capital flows from abroad addresses these imbalances. But can one be satisfied with a situation that is so precarious? Indeed, financial dependence grows. However, any imbalance, especially reaches this magnitude of a palpable tension as it is hard to imagine how the situation could recover smoothly. Is the financial dependency of the United States a bomb for the global economy? The lifestyle of Americans is such that it does not allow them to pay a high price, even eventually. To answer these questions, one must first look at the origins of this dependence. So in this paper one can see if it is a temporary phenomenon or a deeply rooted one. Then it will examine the viability of the situation and will determine if it is facing an urgent threat or a nagging imbalance. Then it will try to understand why the crisis has not yet exploded. Finally, it will focus on the solutions, in the policies undertaken so far, and then consider other remedies.

The financial dependency of the United States may result from two major imbalances: the first between domestic production and domestic demand, and the second between domestic investment and domestic savings. One, is analyzed using the coverage that indicates "the extent to which revenues from sales to non-residents cover the costs incurred in purchasing non-residents (exports / imports)," according to Jacques which is generous. The other takes into account external financing needs of both companies, who can finance their investments by domestic savings, and the federal government with a budget deficit.

The balance of trade in goods and services is a key to understanding the current state of the U.S. current account. The only trade in goods can explain 95% of the degradation of the current account deficit between 1995 and 2002. Indeed, Hendrik Houtahkker and Stephen Magee found in 1969 that the income elasticity of imports from the United States is greater than the income elasticity of exports. This means that U.S. consumers use a larger share of their income to buy imported goods than the foreigners vis-a-vis U.S. goods. As a result, the U.S. trade deficit would widen even if GDP growth kept pace in all countries and if the exchange rate remained stable.

Tags: Financial dependence of the USA; US deficit; balance of trade in goods

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