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The United States Current Account Deficit

1417 words - 6 pages

The largest and richest world economy belongs to the United States (“North America,” 2011). Interestingly, this same monstrous economy also holds the title for the largest current account deficit. The U.S. current account deficit is funded from net capital inflows from abroad and has continued to grow throughout the last two decades (Holman, 2001). Economists in the early part of this century theorized that this huge U.S. external deficit was sustainable because it would gradually correct itself and in a few short years, the deficit would narrow, but this was not the case (Holman, 2001). The United States, continually fueled by foreign investments, became a net debtor nation. The unique position that the United States holds in the world economy allows the country to run persistent external deficits, but this is not a safe practice. In order to be safe from sudden foreign shifts in confidence, the United States must strive to minimize the deficit by formulating a strategic plan to prioritize expenses and avoid perpetual damage.
The United States’ current account deficit is a result of the nation importing more than it is exporting or consuming more than it is producing (Ott, n.d.). The current account is a subaccount of the balance of payments, which is a method of tracking economic interactions with other countries (Carbaugh, 2011). The other subaccount of the balance of payments is the capital and financial account. A deficit in the current account means that there is a surplus in the capital and financial account, and vice versa. A country is considered a net debtor when the money in the current account is less than that of the capital and financial account. Furthermore, this net debtor label means that foreign nations own more of a country’s debt than the country itself owns of its debts.
After the intermittent economic crises during the 20th century, the U.S. was commended for its ability to reform its economy and become a net creditor nation (Carbaugh, 2011). This means that U.S. residents were investing more funds abroad than foreign investors were. However, in 1987 the U.S. became a net international debtor and has actually retained this position since then (Carbaugh, 2011). The U.S. has been practicing what economists have termed, “dissaving” in which you consume more than you produce and have nothing left over to invest (Wheelan, 2010). Carbaugh (2011, p. 359) indicates that a main reason that being a net international debtor is not a desirable position to be in is a matter of sheer “propriety”. If the U.S. has the largest economy in the world and has sustained economic growth rates, then it should not be borrowing so heavily from other nations (Carbaugh, 2011).
The U.S. net international debtor issue has been linked to several deep-seated issues which includes the U.S. government’s failure to predict how decisions and policies made in the present will affect the future (Walker, 2008). This issue has been...

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