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The U.S. Current Account Deficit -- Threat or Way of Life?

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U.S. current account deficit

The U.S. current account deficit is partly caused by net income paid to foreign owners of U.S. assets. (Photo: Don Kravitz/Getty Images)

The U.S. current account deficit is what U.S. citizens, businesses and government borrow from their foreign counterparts. The U.S. current account deficit hit a record $803 billion in 2006, a dramatic increase from the $120 billion level in 1996. Those who were concerned about the current account deficit asked "Why would the richest country on earth need to borrow money to sustain its economy?" This question identified one of the drivers of the economic bubble that, when it burst, created the 2008 financial crisis.(Source: Federal Reserve, The Global Savings Glut and the U.S. Current Account Deficit)

During the recession, the current account deficit disappeared, as trade and financing dried up. However, the factors that caused the deficit -- high consumer debt, the U.S. Federal budget deficit and debt, and high savings rates in Japan and China -- still remain. If not addressed, these factors will eventually limit U.S. economic growth. Why? Many experts say that the deficit is unsustainable and that the unwinding of this deficit is, ultimately, the greatest single threat to the global economy. Others state that, since the U.S. economy is so large and comparatively stable, it is unlike other countries and can carry the current account deficit without a problem.

Current Status

The current account deficit was $473.4 billion in 2011. Although just 3% of the $14.7 trillion U.S. Gross Domestic Product (GDP), it was still the worst current account balance in the world. This was up from $470.9 billion in 2010, the second year since the recession that the deficit grew. The increase was mostly caused by the U.S. trade deficit of $556.9 billion. Unilateral transfer payments, such as government grants, pensions, and remittances from foreign workers back their home countries, also added $134.6 billion to the current account deficit. These deficits were not offset by a surplus of $221 billion in net income on U.S. assets owned abroad, and wages paid to U.S. employees working abroad. (Source: Bureau of Economic Analysis, U.S. International Transactions; CIA WorldFactbook, Current Account Balance World Rank, 2011)

Background

The U.S. current account deficit is basically a giant loan made by foreign investors, including U.S. Treasury notes, to pay for a country's trade deficit. Because U.S. Treasury notes are guaranteed by the government, they are considered the safest investment in the world.

Several unusual factors in the past several decades contributed to the deficit's size, by sending money into the relative safety of U.S. Treasury Notes:

  • The global stock market crashes in 2008 and 2000.
  • In the late 1990s, Argentina and other Latin American countries defaulted on their loans.
  • In the late 1980s, the South East Asian emerging markets crashed. It took this long for money to return.
  • In the late 1980s, Japan experienced a crash in its housing market, which brought down the entire economy. Investors avoided the world's second largest economy.
  • Furthermore, the Bank of Japan (BOJ) stimulated the economy by printing yen. With the excess yen, the BOJ bought Treasury Notes, and became one of the largest holders.
  • To recover from all of these recessions and crashes, governments around the world lowered prime lending rates. This created an excess of cash, all looking for a nice, safe investment.
  • As China sought to stimulate its economy, it bought Treasury Notes as a way to keep its own currency lower than the dollar, allowing it to underprice U.S. goods, and increase its exports. It's now the largest holder of Treasuries. For more, see What Is the U.S. Debt to China?.

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