Financial Markets and Institutions (2-downloads)

Why the Large U.S. Current Account 

Deficit Worries Economists

The large U.S. current account deficits in recent

years—in 2009 it was $250 billion, 1.7% of GDP—

worries economists for several reasons. First, it indi-

cates that at current exchange rate values, foreigners’

demand for U.S. exports is far less than Americans’

demand for imports. As we saw in the previous chap-

ter, low demand for U.S. exports and high U.S.

demand for imports may lead to a future decline in

the value of the U.S. dollar.

Second, the current account deficit means that for-

eigners’ claims on U.S. assets are growing, and

these claims will have to be paid back at some point.

Americans are mortgaging their future to foreigners;

when the bill comes due, Americans will be poorer.

Furthermore, if Americans have a greater preference

for dollar assets than foreigners do, the movement of

American wealth to foreigners could decrease the

demand for dollar assets over time, also causing the

dollar to depreciate.

The hope is that the eventual decline in the dollar

resulting from the large U.S. current account deficits

will be a gradual one, occurring over a period of

several years. If the decline is precipitous, however, it

could potentially disrupt financial markets and hurt

the U.S. economy.

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Chapter 16 The International Financial System