how dangerous is the u.s. current strongaccountstrong deficit - st. louis.pdfVIP

The Regional Economist n april 2006 How Dangerous Is the U.S. Current Account Deficit? By Cletus C. Coughlin, Michael R. Pakko and William Poole in recent years, the u.s. external deficit has attracted con- siderable attention from academics, policymakers and the media. one manifestation of recent trends that has raised concerns is a growing trade deficit—the difference between u.s. exports and imports of goods and services. More generally, it is useful to consider the broader as a practical matter, the u.s. net international concept of the current account, which includes earn- investment position cannot become ever more ings on investments, as well as trade in goods and negative as a percentage of Gdp. in fact, economic services. as shown in the figure below, the u.s. cur- theory suggests that it’s likely that today’s current rent account deficit has been increasing as a percent- account deficits will need to be trimmed or reversed age of gross domestic product (Gdp) since the early over the long run. the question is not whether the 1990s, with the present deficit exceeding 6 percent.1 u.s. current account deficit will narrow in the future When a country runs a current account deficit, its but whether the inevitable adjustment is likely to be purchases of goods and services from abroad exceed painful and disruptive of economic growth and sta- its sales of goods and services to foreign buyers. at bility—a “hard landing” precipitated by a dramatic the same time, the country is necessarily selling decline in the foreign exchange value of the dollar assets to foreigners, net of its purchases of assets as investors shun dollar-denominated assets. abroad, in an amount equal to the current account provided that u.s. monetary and fiscal authori- deficit. Consequently, as current account deficits ties maintain sound policies, the hard-landing have accumulated over time, the net in