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Current Account Deficits Essay

1398 words - 6 pages

Carbaugh (2011) asks, "Can the United States Continue to Run Current Account Deficits Indefinitely?" (p. 361). Ultimately in the long term the answer is no, but the question could be rephrased to ask: (1) Does the United States' unique position in the world economy allow the country to safely run persistent external deficits? and (2) can persistent U.S. deficits in the current and payments accounts be adjusted without bringing about economic recession or crisis? Japan, China, and Middle Eastern oil countries have enabled this deficit to continue by heavily investing in U.S. Treasury securities (Carbaugh, 2011). Because foreigners desire to purchase American assets, Carbaugh (2011) concludes that “there is no economic reason why [the U.S. current account deficit] cannot continue indefinitely” (pp. 361-362). Deutsche Bank Research (Karczmar, 2004), in examining the “widespread worries and fears as to how long this condition may last and how could it be rectified,” also concludes: “Closer examination of this issue shows, however, that the worries are far from justified and the fears greatly exaggerated” (p. 8). In this context, it is appropriate to evaluate the two questions raised above regarding the United States external current account deficits.
(1) Does the United States' unique position in the world economy allow
the country to safely run persistent external deficits?
The world relies on the U.S. dollar—more than 60 percent of global monetary reserves are held in U.S. dollars—61.4 percent as of the third quarter of 2013 (International Monetary Fund, 2013). Consequently, Deutsche Bank Research (Karczmar, 2004) concludes that the U.S. dollar’s function as the main reserve currency makes the current-account deficit inevitable because of
(a) inflow to the U.S. of monetary reserves of foreign central banks due to the normal accumulation of these reserves, especially in countries with current account surpluses, and (b) occasional interventions in foreign exchange markets by countries trying to resist the appreciation of their currencies vis-à-vis the U.S. dollar. (p. 5)
Deutsche Bank (Karczmar, 2004) suggests that the euro could eventually challenge the dollar as a reserve currency, but the euro is still far behind the U.S. dollar as a reserve currency, representing just 24.2 percent of the world banking reserves in the 2013 third quarter (International Monetary Fund, 2013). Numerous economists endorse the United States’ ability to safely continue its external deficits. Cooper (2001) poses the argument in its simplest form:
It is often suggested that the large current account deficit poses a serious financing problem for the United States. Each year, the lament goes, the United States must attract net inflows of capital sufficient to "cover" the huge current shortfall. But this proposition gets the logic backward: the U.S. deficit is "financed" by net capital inflows only in an ex post accounting sense. In economic terms it is more nearly...

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