The large US current account deficit is attributed to a widening trade imbalance which accounts for 87% of the US deficit. The trade deficit is the result of globalization, consumer spending, and large current account surpluses found in China, oil exporting countries, and Russia totaling a combined surplus of $920B in 2008.
China bought U.S. Treasuries to support the value of the dollar, and keep its exports cheap. It is now the largest lender to the U.S. Government. In November 2010, China owned $895 billion in U.S. Treasuries, 32% of the total $2.8 trillion outstanding. Many are concerned that this gives China political leverage over U.S. fiscal policy, since it could theoretically call in its loan. By buying Treasuries, China helped keep U.S. interest rates low. Until the Subprime Mortgage Crisis, this helped fuel the U.S. housing boom. If China were to stop buying Treasuries, interest rates would rise, delaying any recovery from the recession. This isn't in China's best interests, as U.S. shoppers would buy fewer Chinese exports. However, China is buying fewer Treasuries than in November 2009, when it owned $929 billion. China is diversifying its holdings into other currencies, such as the euro.
The U.S. trade deficit with China means that U.S. companies that can't compete with cheap Chinese goods must either lower their costs or go out of business. Globalization of production resulting from low labor costs in China and other emerging markets have led US firms to move production overseas. Dependence on foreign oil is also a major factor. From 1992-2008, US imports increased 394% from $537B to $2,117B. Whereas, US exports increased by 290%. Increased consumer spending on imports was supported by a housing boom fueled by tax cuts, low interest rates, and rising household debt.
Deficits are not always a negative and can be sustained when there is fiscal responsibility and fair trade balances. Deficits of between 1%... [continues]
Cite This Essay
(2012, 05). Us Current Houseing Deficit. StudyMode.com. Retrieved 05, 2012, from http://www.studymode.com/essays/Us-Current-Houseing-Deficit-997300.html
"Us Current Houseing Deficit" StudyMode.com. 05 2012. 05 2012 <http://www.studymode.com/essays/Us-Current-Houseing-Deficit-997300.html>.
"Us Current Houseing Deficit." StudyMode.com. 05, 2012. Accessed 05, 2012. http://www.studymode.com/essays/Us-Current-Houseing-Deficit-997300.html.