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

Arguments For

The greatest threat is that, due to the large size of the debt, at some point investors will lose confidence that they will get their money back. No one knows what this tipping point could be, because no country with an economy this large has ever run a debt this large. Once investors lose confidence, a panic could ensure, causing everyone to sell their Treasury Notes immediately, at any price, to avoid losing more money.

As the safety of Treasury investments is questioned, other investments will become more attractive:

• The global stock market is becoming more transparent.
Latin American and South East Asian countries have become more open to investment.
• Japan's economy is finally recovering.
• Central banks throughout the world have not dropped rates as low as the U.S. This makes their own countries' bonds look more attractive.
• U.S. Senators are putting pressure on China to raise its currency to allow the U.S. to become more competitive. The higher China allows its currency to rise, the less Treasury Notes it needs.

Arguments Against

Despite the above arguments, many experts state that the sheer size and importance of the U.S. economy will prevent any disastrous crash. All countries involved will work diligently to keep the U.S. economy afloat, because they know that if the U.S. ship goes down, all their ships will, too. Although they agree that, at some point, other countries will stop lending the U.S. money to buy their goods, the process will be stable and with little negative impact.

Outcome

Regardless of whether the current account deficit unwinds via a disastrous crash or a slow, controlled decline, the net impact on your lifestyle will be the same. As investors around the world pull out of Treasury Notes, they will become in lower demand. As they are in less demand, their prices will lower. As the value of Treasury Notes lower, so does the relative value of the dollar. As the dollar declines, so does your ability to buy imports.