An Analysis On The Sustainability Of U.S. Current Account Deficit And The Global Economic Imbalance

The global economic imbalance has now become a topic aroused widespread attention. It will have far-reaching effects on the world economy and the economic development of all countries. This paper will start to study the sustainability of the global economic imbalance from one of the two performances of it- the U.S. current account deficit.This paper includes four chapters. In the first chapter(Introduction), the theoretical and practical significance of this subject is introduced, the relevant research of scholars from home and broad is outlined, the structure of this paper is introduced, the main viewpoints and the author's creativity is also given.The second chapter is the basis of this paper, aiming to prove that the sustainability of the U.S. current account deficit shows a direct reflection of the sustainability of the global economic imbalance. According to the analyses of the globalization of the economy, the American exports and imports, the American macroeconomic policies and the dollar hegemony, the paper reaches a conclusion that the large trade surplus of Asian countries is caused by the U.S. current account deficit. Firstly, the economic globalization has made the United States and other developed countries can make cross-border movement of factors of production, which has created conditions for the formation of the existing international division. In other words, this action has prompted the formation of the export-oriented strategy of Asian countries, which has laid the foundation for the imbalance of trade between Asia and the United States. Secondly, the United States limits the exports to Asian countries, particularly those of high-tech products. This situation inevitably results in the trade imbalance between the two. Thirdly, in order to prevent an economic recession, the United States has been pursuing an expansionary macroeconomic policy for a long time. The United States uses this policy to stimulate consumption and investment. The increase in consumption and investment, resulting in a serious shortage of savings, has enabled the United States must rely on foreign imports to meet domestic economic growth, which leads to further expansion of the U.S. current account deficit. Finally, after the collapse of the Bretton Woods system, the role of the dollar in international reserve system has not been weakened, but become stronger. After the collapse of the Bretton Woods system, the role of the dollar in international reserve system has not weakened, but became stronger. The separation between dollar and gold makes the United States need not to worry about the external debt, while Asian countries have no choice but to maintain a surplus for the United States.The third chapter of this paper analyzes the sustainability of the global imbalance from the sustainability of the U.S. current account deficit. Firstly, analyze the composition of the U.S. current account deficit. We can learn from economics theories that the current account deficit is caused by three main reasons: private investment, private savings and government surplus (deficit). By analyzing these reasons, we find that the U.S. current account deficit is mainly caused by the government. Secondly, analyze the sustainability of the U.S. current account deficit based on the above conclusions. From a long-term perspective, the sustainability of the U.S. current account deficit depends on the sustainability of American solvency, the ability and willingness of other countries to finance the United States and the ability of the United States to attract foreign financing.1. The solvency of the United States is not sustainable. Foreign investment doesn't finance the productive areas, but mainly the non-tradable goods sectors, especially real estate sector. This kind of investment does not increase the ability of the United States in the future to repay debt. Meanwhile, foreign investors, particularly central banks, provide financing for the United States through the purchase of U.S. government bonds. This gives a greater risk to American solvency. On the other hand, the United States will face a crisis either to achieve a relatively low level of net foreign debt or to achieve a relatively low level of current account deficit.2. The ability and willing of other countries to finance the United States is not sustainable. On one hand, if we do not control the U.S. current account deficit, within the next few years, the net foreign debt will increase to the amount which Asian countries unable to absorb. On the other hand, there is a "new Triffin dilemma" in the international monetary system nowadays. The ultimate result is that other countries will no longer willing to hold dollar, or to provide financing support for the United States. 3. The ability of the United States to attract financing from abroad is not sustainable. In today's world, the dependence on the U.S. capital market and the dollar is weakening. The United States is facing with a challenge of other countries and regions` rising. On one hand, the rising of the euro is a challenge against the dollar and the U.S. capital market. On the other hand, with the emergence of China, Asia and other emerging economies, the situation of a single strong dollar is changing. Dollar's position as the preferred currency of one country's foreign exchange reserve has begun to change.The fourth chapter of this paper is the policy recommendations. Firstly, it is the export-oriented economic development strategy which Asian countries, particularly China uses that leads to the economic development of these countries over-relies on the U.S. exports. Once the U.S. deficit and foreign debt can not continue, these countries, particularly China will bear the cost of the collapse of the global economy. To prevent the risks and hazards brought by the not-sustainability of the global economy in the future, we should make hay while the sun shines and fundamentally change China's macroeconomic situation. Secondly, two proposals on what China should do to adjust the economic structure.1. Regard the expansion of domestic demand as a basic starting point of China's economic development to enhance the capacity to withstand external shocks. On one hand, we should study how to speed up the urbanization process on the basis of maintaining sustained growth in foreign demand, and gradually expand private consumption and investment. On the other hand, use demand-driven imports to gradually change China's trade structure. 2. We should readjust the structure of China's foreign exchange reserves.