Should The US Balance Of Payments (BOP) Deficit?
Introduction
The US Balance of Payments (BOP) deficit is largely attributable to its massive current account deficit. The US has had a massive current account deficit since 1991, hitting an all time high of US$800 billion in 2005. "Never in the history of modern economics has a large industrial country run persistent current account deficits of the magnitude posted by the United States since 2000" (Edwards, 2005, p. 260). Accumulating consistent current account deficits mean that foreign countries have an increasing claim on American assets, such as US Treasury bills. As of 2014, foreigners owned about half of US public debt ($17.6 trillion).
In contrast, most advanced industrialised economies of Asia have been running large current account …show more content…
A main contributor to rising US expenditure is the burgeoning federal budget. Since 2001, both Presidents George W. Bush and Barack Obama have accumulated a fiscal budget debt of $11.9 trillion, 67.6% of total US debt. This is due to the sharp increase in military spending during the Afghanistan and Iraq wars ($800 billion a year), Obama’s fiscal stimulus during the global economic crisis of 2008 ($787 billion), further tax cuts ($858 billion) and Obamacare ($265 billion) (Amadeo, 2014). An immediate solution to reduce US current account deficits would therefore be to introduce budgetary cuts, such as the slashing of the Pentagon’s budget by an estimated $487 billion in the next decade (Alexander & Wolf, …show more content…
An appreciation of the RMB will cause the prices of commodities to inflate across the globe and hurt consumers worldwide. “Unless (American consumers) are prepared to see their Wal-Mart bills triple, they better hope China keeps the Yuan as low for as long as it takes” (Simpkins, 2010). Global financial instability will also result if China rapidly appreciates its currency according to American demands. Meyer (2011) also notes how when China appreciated its currency in 2005, a “bull market in Asian stocks” was created. “Between July 2005 and October 2007, the Hang Seng China Enterprises Index rose 319%, while having no impact on trade
The US Balance of Payments (BOP) deficit is largely attributable to its massive current account deficit. The US has had a massive current account deficit since 1991, hitting an all time high of US$800 billion in 2005. "Never in the history of modern economics has a large industrial country run persistent current account deficits of the magnitude posted by the United States since 2000" (Edwards, 2005, p. 260). Accumulating consistent current account deficits mean that foreign countries have an increasing claim on American assets, such as US Treasury bills. As of 2014, foreigners owned about half of US public debt ($17.6 trillion).
In contrast, most advanced industrialised economies of Asia have been running large current account …show more content…
A main contributor to rising US expenditure is the burgeoning federal budget. Since 2001, both Presidents George W. Bush and Barack Obama have accumulated a fiscal budget debt of $11.9 trillion, 67.6% of total US debt. This is due to the sharp increase in military spending during the Afghanistan and Iraq wars ($800 billion a year), Obama’s fiscal stimulus during the global economic crisis of 2008 ($787 billion), further tax cuts ($858 billion) and Obamacare ($265 billion) (Amadeo, 2014). An immediate solution to reduce US current account deficits would therefore be to introduce budgetary cuts, such as the slashing of the Pentagon’s budget by an estimated $487 billion in the next decade (Alexander & Wolf, …show more content…
An appreciation of the RMB will cause the prices of commodities to inflate across the globe and hurt consumers worldwide. “Unless (American consumers) are prepared to see their Wal-Mart bills triple, they better hope China keeps the Yuan as low for as long as it takes” (Simpkins, 2010). Global financial instability will also result if China rapidly appreciates its currency according to American demands. Meyer (2011) also notes how when China appreciated its currency in 2005, a “bull market in Asian stocks” was created. “Between July 2005 and October 2007, the Hang Seng China Enterprises Index rose 319%, while having no impact on trade