International monetary relations

¶ … media and others suggest that the current account deficit run by the U.S. is a problem for the economy. What do you think? What action(s) would you advise federal government officials to take on this issue? Be sure to define and explain the current account deficit.

current account deficit is the sum total of U.S. trade in goods and services and income and transfer payments. At present, the U.S. current account deficit is 4%. This relatively low rate is partially due to the 2008 -- 09 recession, lower oil prices, slower rates of growth, and fewer imports due to decreased demand. "From 1991 through 2006, the U.S. current account deficit -- the broadest measure of U.S. trade in goods and services and income and transfer payments -- rose from roughly zero to 6 1/2% of U.S. GDP, with about 40% of the increase occurring after 2001," during the Bush Administration ("Current account deficit," 2010).

One of the fears regarding the current wave of deficit spending is that China has a current account surplus in relation to the U.S. deficit, and so much of America's borrowed money lies in China's hands. Additionally, economists that advocate making a substantial commitment to decreasing the deficit fear also fear that "the national debt is fast approaching an amount equal to one year's GDP -- a trend that could put America's AAA credit rating at risk in coming years" (Trumball 2010). However, most financial experts think that given the need to further stimulate the economy to decrease unemployment, the Obama Administration has little choice but to continue to spend at a deficit. Unless there is job growth, income derived from taxation will continue to go down, and the vicious cycle of debt will continue. "Many finance experts say that Obama's basic strategy" of stimulus and middle-class tax cuts for Americans who are more likely to spend than save the additional revenue "is the right one for a nation still mired near the trough of a deep recession. But the effort carries economic risks. Investors could demand higher interest rates on Treasury debt because of worries that Washington will never act to bring deficits down. The recent debt crisis in Greece is a reminder of the kind of troubles that can arise -- and large nations like the United States are not necessarily immune" (Trumball 2010).