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.
[...] 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. In the U.S. we talk about a “twin deficit”, which refers to the joint budget and current account deficits. We can consider that the current account balance equals savings minus investment. [...]
[...] current account deficit has short term consequences on the international finance, it can also have long term consequences on the U.S. domestic economy. If the U.S. keeps on running such a current account deficit, its indebtness to the rest of the world will also increase. And, the more it gets indebt, the more sizeable the debt service is (interests, dividends This debt service can be large enough to consume a larger part of income, which means that it could cut into current consumption and business investment, hampering the U.S. [...]
[...] Domestic firms will have to borrow funds from abroad, thus leading to a widening of the current account deficit. According to Fergusson, it is likely that the increase in U.S. productivity growth is one of the two most important factors behind the existing current account deficit, the other one being the low level of investment expenditures in foreign countries, which he called the slump in foreign domestic demand. Causes from outside In many countries, domestic demand growth has decreased. “This weakening of foreign spending has enhanced the supply of capital available to the United States, put down the pressure on U.S. [...]
[...] A large and persistent current account deficit means that the United States is financing its deficit by borrowing abroad, which causes the U.S. international indebtness to increase proportionnaly. Private investors might wonder if the U.S. is going to pay back and they might switch to foreign securities, just like any banker would be hesitant to lend money to people who are already highly into debt. This would then foment a credit risk felt by private investors. Indeed, there is a credit risk when doubt is cast on the reliability of the counterpart. [...]
[...] 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. From International Finance's Point of View (Short Term Effect) In order to finance its ever growing current account deficit, the U.S. is dependent on a steady flow of foreign capital (at least two billion dollars from foreign countries enter the U.S. [...]
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