Analysis of the current account deficit of the United States

Abstract

The current account deficit in the US is a very hot topic, as the first worldwide economy presents a bigger and bigger deficit since the 1990s. This country characteristic reflects the way of living in the US: spending more money than they actually earn. A recent consequence to this economical behavior has been the financial crisis. It highlights the issue about the sustainability of such a deficit and the consequences of it. Let us first give a definition of the current account. The current account is one of the three components of the balance of payments, together with the capital account and the reserve account. The balance of payments is the systematic accounting of all the flows between a certain country and the rest of the world. The current account is calculated by subtracting the imports from the exports of goods and services. The capital account is calculated by subtracting the change in domestic ownership of foreign assets by the change in foreign ownership of domestic assets. It implies a rise in net foreign debt1 . The reserve account only includes ‘reserve assets’, these are assets which the monetary authority of a country uses to settle the deficits and surpluses that arise on the two categories. Generally this last component is very small compared to the two first components. The sum of the three components always equals zero. Therefore a deficit in the current account implies both that imports are higher than exports and a rise in net foreign debt. Since net foreign debt needs to be repaid somehow in the future, a country with a net foreign debt will have to generate current account surpluses in order to reduce this debt. On the long term therefore recent current account deficits will always be compensated by future current account surpluses. Within this paper, we first present different theories of the current account deficit. It will allow the reader to understand how to compensate it as well as the consequences of it on exchange rates and thus indirectly on exports for example. We will pay particular attention on the consequences of a sudden drop of the economy, generally caused by a banking crisis to outline the fragility of having a sustained deficit. The recent financial crisis will illustrate the consequences of a sudden drop of the economy within our second chapter. We will analyze the specificities of the American reactions / interventions after the explosion of this crisis: government intervention, impact of the dollar, spread of this crisis to the world, aspect of the immigration. Then, we will adopt a historical perspective in order to better understand the actions of the US government facing the current crisis. We will underline the role of Bretton Woods in the past as compared to the current “non-system”. In parallel, we will discuss the different ways this deficit is financed worldwide. We will highlight the changes of the countries financing it, as well as trying to draw the long-term consequences on future main economical players (translating to Asia). Eventually, we will complete this macro approach with a basic statistical analysis in our fourth chapter. The objective is to analyze the current deficit account with other variables such as inflation, GDP growth, nominal interest rate, budget deficit and inflation-adjusted oil price.