Introduction:
Since in the 1980’s, one of the most persistent challenges to The United States’ economy and her policy makers has been the deficit of the U.S. current account. A current account is made up of four separate categories, the combined balance of which results in a surplus or deficit. The four categories are: The Merchandise Trade Account, Services, Factor Income, and Unilateral Transfers. Each account either has a surplus or a deficit, depending on whether money is flowing into or out of a particular country. The U.S. Trade Account deficit currently is the largest contributor to the U.S. Current Account deficit. This deficit is comprised of what United States citizens, businesses and government borrow from their foreign counterparts. It seems counter intuitive that one of the wealthiest developed countries in the world would need, or even want, to borrow from its trading partners. This paper will attempt to summarize the reasons for the large U.S. Current Account deficit, whether it is a problem, what can be done to reduce this deficit, and how some investors try to mitigate potential risk associated with a deficit.
The United States Current Account deficit continues to rise as a share of GDP. It reached a record high of 5.7% GDP in the first half of 2005, before declining to an average of 3% GDP by 2011-2012. Although there are many contributors for the 2005 level, many blame the U.S.’s lackluster interest in reducing its budget deficit; specifically, open spending on the War on Terror while proposing tax cuts was likened to fiscal delusion. Consider the following equations:
Current Account ≡ Export – Import and (S – I) + (T – G) ≡ X – M ≡ Current Account
Since both the US government and its citizens ...
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Chart Source:
http://research.stlouisfed.org/fred2/series/BOPBCA
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The US has been in and out of debt countless times throughout history, going as far back as the Civil War. However, debt did not become a truly relevant problem until much later, in the 1980s (Budget Deficits). Up to that point, large budget deficits were generally only allowed during wartime, but this pattern ended after the Great Depression. Roosevelt’s New Deal meant that the government spent much more than it previously did, even after the economy improved (Budget De...
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Since the early 1970’s, Americans have had trouble controlling a huge money issue. The United States government has engaged in deficit spending. This occurs when spending exceeds the amount of income taken in (“Budget”). American politics have been trying to come up with ideas that the government can implement to fix our current deficit issue. Some strategies that the government may use are spending less, collecting more taxes, and balancing trade (“Atkins”). The federal deficit has become a big issue and Americans must try everything to reduce the debt. We must come up with a plan that will strive for a balanced budget.
The U.S. National debt affects consumers every day, but probably most notably in Americans facing higher taxes, higher interest rates, and the U.S. government cutting back on services, weaker job markets, and lastly inflation. The national debt exists as a result of government shortfalls, or deficit budgets in which the government's expenses exceed its revenues. Internal debt includes the amount borrowed from sources within the country. The government raises this money by selling bonds, bills, securities, and government. Along with internal debt, countries are also likely to have external debt. External debt is the money borrowed from foreign sou...
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The United States’ national debt is $18 trillion and increases $16,692 every second (“National”). This debt amounts to $56,704 per citizen (“National”). The government plans to spend $3.9 trillion in the year 2015 (“Federal”). This money comes from taxpayers. When the government does not raise enough revenue to cover their budget, the U.S. Treasury borrows more funds. The government creates many problems for the United States when they spend money that increases the national debt. The most important problem in the United States is the government’s financial spending.
In November of 2004, the United States ran a fifty-four billion dollar trade deficit, translating to over 600 billion for the entire year. This deficit is a result of the disparity between the amount of goods that the US imports and the amount it exports. To equalize this deficit in its current account, the American government sells assets from its capital account, often to foreign investors. This phenomenon is seen as a serious threat to the success and continued growth of the nation’s economy, tied in with popular concerns that the United States is losing its competitive and dominant edge in global economics. The traditional economic theory employed to solve this problem calls for a return to mercantile protectionism, through use of tariffs and subsidies to drive up the price of imports and lower the price of exports. Running contrary to this is a second option: increasing domestic savings and lowering government spending. These theories both aim to decrease American dependence upon foreign imports and investment, and ultimately equalize the enormous trade deficit that currently exists.
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