The US Current Account Deficit: Its Reason And Sustainability

The huge and growing US current account deficit has become the most important part of global imbalance which represents the greatest threat to the continued stability of the United States and world economies. It is also the hot issue in the academic field. There are totally six sections to introduce and analyze the deficit in this thesis.In the first part (Introduction), the relevant research of scholars from home and broad is outlined, the theoretical and practical significance of this subject is introduced. The main viewpoints and research method are also given.Partâ…¡introduces the present status of US payments balance, including current account,financial account and capital services account which belongs to current account. The surplus in financial account can be divided into two parts: net private capital inflow and net official capital inflow. Net private capital inflow gradually decreased while net official capital inflow largely increased which is in a higher proportion as financing current account deficit since 2000. This part also analyses the capital services account which figures the external indebtedness of a country. Higher returns on US assets abroad than on foreign holdings of assets in the United States result in capital services account surplus which means the United States has remained an"economic"creditor despite becoming an"accounting"net debtor. The US balance of payments shows that the United States has enjoyed a free debt despite the large deficit in current account. Partâ…¢analyses several factors which contributed to the widening of the current account deficit. From internal aspect, low level of private saving,high level of private consumption and government expense restrict the export ability and result in current account deficit to offset the gap. From external aspect, the global saving glut brings"fortune effect"to the American and results in the decrease of US saving rate. Official capital inflow from Asia by purchasing the US bond is most outstanding whose reason includes: These countries realized the importance of increasing foreign exchange reserve to resist external strike; US dollar hegemony in the current international financial system forces Asia countries to make investment of exchange reserve to the Unite States;the hope of Asia countries that the capital can return by the form of FDI to converse the economy structure and so on. The paper gets the conclusion that the two reasons are both reasonable explaination to the growing US current account deficit. The difference is the endogenetic parameter is saving in one and foreign capital inflow in the other.Partâ…£analyses the sustainability of US current account deficit. From the aspect of NIIP, as the largest debtor in the world, the Unite States can avoid debt crisis only if it is adequately financed from the experience of other industrial countries in history. Thereby, the problem concerning deficit sustainability can be translated into the issue of external financing stability. The investors'suspicion to the foreground of US economy and the confidence decrease of the capital security result in the gradually decrease of US assets attraction. Although there is a circle mechanism which benefits both deficit and surplus countries and there is no obvious evidence of capital flight out of the dollar, the current account deficit is unsustainable. The reasons are as follows: First, the Bretton Woods Systemâ…¡which represents financing arrangement of America and Asia countries still can't overcome"Triffin Dilemma". If the Unite States continues its deficit which surplus the will and ability of Asia countries, the confidence of the US assets will be acutely shaken and the system will be broke down immediately. On the other hand, the creation of the Euro provides a true financial alternative to the dollar for the first time and becomes counterpart to attract international investment.Partâ…¤discusses the correction path of US current account deficit. The correction should include the dollar exchange rate adjustment and US budget deficit cutting in order to avoid"hard landing". On the basis of the relationship between the exchange rate and US current account deficit since 1980s, the risk of the rapid decline of dollar exchange rate and"hard landing"is getting larger because of the increasing oil price and the US economy which is now at full employment. The adjustment method concerning the exchange rate should include the dollar gradually depreciates to other main currencies in the world and Asia currencies appreciate on their own initiative. This thesis discusses the feasibility of each method according to analyse above. For the budget adjustment, on the basis of the relationship between the budget deficit and current account deficit in addition to the reason of their correlation and deviation since 1980s, the thesis points out that budget correction is indispensable in order to reach the goal of current account correction. It will cut the demand of domestic demand and import so as to hold down the current account deficit directly. The thesis agrees with Michael Mussa that it is feasible to convert the US budget deficits into modest surpluses. At the same time, the US government should adjust the structure of private consumption and investment, encourage the conversion from consumption to saving, adopt modest fiscal and monetary policies to maintain the macroeconomic stabilization.The final part shows how to adjust development strategy to cut the loss brought by external imbalance in China which becomes the largest creditor in the world. The suggestions of the strategy adjustment are to strengthen macroeconomic control concerning to the consumption and saving; adjust the exchange rate institution and foreign exchange reserve management and convert the strategy of foreign investment and trade police.