Balancing the Accounts of the Nation

Account Deficiency in U.S.

There are consequences when the amount of money a country spends abroad is very different from what the country receives from the outside world. The current account balance is an abstruse economic concept. In countries that are, spending more outside more than they are taking in then the current account is the point at which the international economies come to terms with the political reality. When countries that have large deficits, trade unions, businesses and parliamentarians are quick to point fingers at the trading partners and make amendments due to their unfair practices. Tension between China and United States is primarily as a result of trade imbalance between these two which has thrown a spotlight on broader consequences of the international financial systems when some of the countries run large and the persistent current account deficits and others accumulate large surpluses.

The current account can be expresses as a difference between the value of goods and services against the value of imports of goods and services. A deficit then means that a country is importing more than it is exporting. The current account is also inclusive of net income like dividends and interest and transfers from abroad like foreign aid which is a portion of the total. A current account Deficit is therefore a reflection of low level of national savings which is relative to the investment or a high investment rate or both. Advanced economies such as the United States usually run current account deficits whereas developing countries run surpluses. The cause of the current U.S. trade deficit are initially there were better investment opportunities within the U.S. more recently there are high U.S. fiscal deficits, fall in U.S. personal savings rate, low investment in Asia and very slow growth in Europe. When the U.S. fiscal deficit continues to go up the other countries will worry about the ability of the U.S. To service and pay back the debts. At some point, the exports will be more than the imports, which is what the U.S. is at currently. The U.S. citizens are also spending their money as opposed to saving it. This means that foreign businesses are interested in obtaining the piece of consumers spending and then adding some of the U.S. consumers money to their revenue. The U.S. now looks like a better place for foreign investors to focus on (Bergsten, 2007).

The current account deficit is a problem in the U.S. since the deficit is destroying the future of the U.S. living standards in that the longer this debt grows the more significant the loss of future income claims will be and there will be a more intense pressure on the living standards in America. This loss of the claim to the future income can be termed as debt service cost that arises from borrowing which is implied by the running of these current account deficits over a period of time. If the current account deficit in the U.S. does not improve then the external debt of the U.S. will go up from 2.4% of the gross domestic product in the U.S. By 2003 to 64% by 2014. At the same time the cost of servicing the additional and not the original debt that will be incurred from 2004 to 2014 will also go up to 1.7% of the GDP in 2014 this translates to $250 billion in 2004 (Ghosh, & Ramakrishnan, 2012).

The current account deficit also causes the dollar to be weaker as compared to other currencies in the world. However, the dollar is not what drives export, the major driver of export is domestic demand in the rest of the world. It is therefore hard to see current account deficient from the side of export closing anytime unless there is a significant domestic demand achieved in the rest of the world. The increased government control of aggregate demand has resulted to many recessions but the management of demand has not been used single mindedly so as to effect the stabilization of the output. In addition, the rise of policy-induced recessions gives an explanation why the economy has remained volatile when it comes to output.

By the late 1990's there as a growth on net financial inflows as a response to the attractive financial opportunities within the U.S. hence leading to the dollar appreciating which caused a further widening of the current account deficit. At that time, there was an adjustment of the current account deficit to these growing financial inflows. This means that when the dollar appreciates there is a simultaneous widening of the current account deficits. When the widening of current account deficit results to adjustment process the dollars then moves up in the opposite direction since more goods and services are brought from abroad as compared to what is sold hence adding dollars to the foreign market making the dollar value to depreciate. This makes the financial instruments in the U.S. more attractive to foreign savers (Bergsten, 2007).