Elements of The Global Economy

The current account deficit of the U.S. has been growing at an increasing rate due to

factors such as high oil prices, imports growing slightly faster than exports, and the low U.S.

savings. We should be concerned over the long run because these trade deficits are

overwhelmingly large in comparison to U.S. GDP and to the small U.S. export base. This

concern in increasingly large deficits implies an even greater increase in the U.S. net external

indebtedness and external balance. U.S. has sometimes relied on dollar depreciation to reduce the

current account deficit. This passive approach suggests that a dollar depreciation of

approximately six percent for a few years would be necessary to produce the same reduction in

account deficit as with meeting the Balanced Budget Act targets. If the U.S. continues to depend

on dollar depreciation, which is resulting from changes in market conceptions, then ultimately

there would be an increase in budget deficit due to higher interest rates raising federal net interest

payments.

III.

The Gold Standard was when the value of a country’s money used to be connected to

the amount of gold the country possessed. Any person holding the country’s paper money was

able to give it to the government and in return receive a par value from the country’s gold

reserves. The Gold Standard was the cause countries became preoccupied with keeping their

gold instead of improving their business environment. The Gold Standard frustrated the Great

Depression because the Federal Reserve increased interest rates to make dollars more valuable,

and therefore restrain people from demanding gold. Instead of increasing interest rates, the Federal Reserve should have lowered rates in order ...

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...rest rates may need to increase; debts need to start being repaid,

there should be reductions in borrowing, and taxes should increase in an attempt to

counterbalance the reduction in borrowing. This problem has potential to be long-term due to the

critical role banks play in the market system. In today's globalized system, a credit crisis can

move through the entire economy and eventually make this a global economic crisis. Side-effects

of this problem for banks, for instance include lack of confidence in lending which causes

reduced access to credit. This global financial crisis will mostly likely be a long-term problem

due to its nature. Although the global economy has begun to recover from the most oppressive

financial crisis since the Great Depression, its financial systems remain defective and there are

domestic as well as external imbalances.