The macro economists are currently facing one of the major problems that are whether the huge and persistent U.S. current account deficits are sustainable or not. There are different thoughts about the present circumstance of worldwide imbalances. The imbalances in United States have a large current account deficit of above 5% of GDP. In simpler manner the above thoughts can be distinguished into those who think that such imbalances will start to grow in a gentle way and those who are concerned that their resolution might involve considerable disturbances to the worldwide economy, disturbances may include a quick fall in the dollar, a quick hike in U.S. interest rates, and extensive unconstructive spillovers to other economies (Blanchard O., & Giavazzi F., 2009). The purpose of the present essay is to find out whether the persistent US current account deficit is sustainable or not. And the different types of policies the government may use to improve its current account position and effects of those on the rest of the world.
The problem, from a lay man’s viewpoint, is that it is very complicated to decide which of the competing thoughts of U.S. current account sustainability are applicable. From distance these all seem to be reasonable. For instance, the “exorbitant privilege” outlook that U.S. may earn its way towards the current account sustainability as United States claims on foreigners and earns greatly when compared to the claims of foreigners on United States. Such difference in the earning would definitely loosen the budget restraint of U.S by maintaining the current account deficits to grow more as they otherwise would have been very large. (Cavallo & Tille., 2010) showcases an optimistic difference in the returns which may reduce the probability of an uncontrollable modification in the U.S. current account and the dollar. If the exorbitant privilege thought is true, then the U.S. current account will be very much sustainable otherwise it will not.
In the present study the researcher tries to argue on the U.S. current account deficits and has taken many views of other analysts to support the study. In the previous years, several number of analysts in academic world, the private division and the applied research institutions have articulated great bit of concern towards the increasing U.S. current account deficit. It is known to everyone that the present circumstance of global imbalance is unsustainable and modifications and steps to control it needs to taken immediately (Caballero, & Hammour M., 2012). The extraordinary degree of the U.S. current account deficit and the increasing net indebtedness of the U.S. have set a fire for analysts’ concerns and there are many arguments that if nothing is done to stop this then the world will be facing a huge financial disaster. Few of the analysts suggested that there may be a forthcoming fall down of the U.S. dollar that will lead to worldwide financial crisis. The most important plan that underlies this thought is that if the U.S. current account deficit is controlled at its present scale, then the U.S. net worldwide legal responsibility will touch 100% of GDP, which is a figure that is measured to be as very huge (Cooper R., 2011).
Figure 1: U.S. Current Account Deficit as a Share of GDP
(Mussa., 2009) proposed that there may be most likely a sensible higher boundary for the U.S. net worldwide legal responsibilities at somewhere less than 100% of U.S. GDP and, therefore current account deficits of 5% or more of U.S. GDP are not indefinitely sustainable. The key for financing of the U.S. current deficit has also become a key problem. Several analysts proposed that because the U.S. has relied on many foreign and especially on Asian central banks’ purchases of treasury securities due to this the United States has become susceptible to unexpected alterations in the prospects and economic responses....