Can the United States Continue to Run Current Account Deficits Indefinitely?
The United States has benefitted from a surplus of saving over investment in many areas of the world that has provided a supply of funds. This surplus of saving has been available to the United States because foreigners have remained willing to loan that saving to the United States in the form of acquiring U.S. assets such as Treasury securities that have accommodated the current account deficits. During the 1990s and the first decade of the 2000s, the United States experienced a decline in its rate of savings and an increase in the rate of domestic investment.
The large increase in the U.S. current account deficit would not have been possible without the accommodating inflows of foreign capital coming from nations with high savings rates such as Japan and China. China is a major supplier of capital to the United States. This is partly because of Chinas exchange rate policy of keeping the value of its yuan low (cheap) so as to export goods to the United States and thus create jobs for its workers (see Chapter 15). In order to offset a rise in the value of the yuan against the dollar, the central bank of China has purchased dollars with yuan. Rather than hold dollars that earn no interest, Chinas central bank has converted much of its dollar holdings into U.S. securities that pay interest. This situation has put the United
States in a unique position to benefit from the willingness of China to finance its current account
deficit. The United States can print money that the Chinese hold in order to finance its excess
spending. The buildup of Chinas dollar reserves helps support the U.S. stock and bond markets
and permits the U.S. government to incur expenditure increases and tax reductions without
increases in domestic U.S. interest rates that would otherwise take place. Some analysts are
concerned that at some point Chinese investors may view the increasing level of U.S. foreign
debt as
International Economics unsustainable or more risky and suddenly shift their capital elsewhere.
They also express concern that the United States will become more politically reliant on China
who might use its large holdings of U.S. securities as leverage against policies it opposes. Can
the United States run current account deficits indefinitely and rely on inflows of foreign capital?
Since the current account deficit arises mainly because foreigners desire to purchase American
assets, there is no economic reason why it cannot continue indefinitely. As long as the
investment opportunities are large enough to provide foreign investors with competitive rates of
return, they will be happy to continue supplying funds to the United States. There is no reason
why the process cannot continue indefinitely: No automatic forces will cause either a current
account deficit or a current account surplus to reverse. U.S. history illustrates this point. From
1820 to 1875, the United States ran current account deficits almost continuously. At this time,
the United States was a relatively poor (by European standards) but rapidly growing country.
Foreign investment helped foster that growth. This situation changed after World War I. The
United States was richer and investment opportunities were more limited. Current account
surpluses were present almost continuously between 1920 and 1970. During the last 40 years, the
situation has again reversed. The current account deficits of the United States are underlain by its
system of secure property rights, a stable political and monetary environment, and a rapidly
growing labor force (compared with Japan and Europe), which make the United States an
attractive place to invest. Moreover, the U.S. saving rate is low compared to its major trading
partners. The U.S. current account deficit reflects this combination of factors, and it is likely to
continue as long as they are present. Simply put, the U.S. current account deficit has reflected a
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