1. Does the United States' unique position in the world economy allow the country to safely run persistent external deficits?
2. Can persistent U.S. deficits in the current and payments accounts be adjusted without bringing about economic recession or crisis?
1. As per the records of U.S balance of payments, it has been time and again mentioned that this part of U.S economy is confusing as well as rarely understood by people. These developments leads to uncertain ripple in the market, and close evaluation of issues show that the issues are grave and there are hardly any short or medium term solutions to the structural reasons (Schneider, 2004). After analyzing the issues it may be mentioned that U.S suffering from account deficit as the people wish to invest more in U.S. The present situation of the country is politically stable, and supports high potential growth rate. In comparison to other growing country, U.S offers higher rates of economic growth.
The deficit in U.S economy is viewed as a negative impact on the U.S financial conditions. Some of the key issues which dragged the situation into such a troublesome scenario are, rise in the foreign indebtedness which leads to suffer from financial problems with time, a high level of dollar depreciation that is essential to handle the situation and in an extreme situation foreigners refuse to offer financial assistance to U.S and help to handle the deficit condition (Sekishita, 2001).
As far as the current economic conditions are concerned in spite of poor economic deficit, the U.S still enjoys advantage in the present situation and it does not need to borrow in money in the traditional sense. Market evaluation ensures that in spite of trouble condition investors are still attracted towards U.S due to attractive return on investment which is much higher than any other country could offer. Besides this the size, scope, openness and the liquidity of U.S capital market and also the role of dollar is premium in the world economy hence preferred for investment, transaction purpose as well as reserves currency (Jorgenson and Wessner, 2006). The rate of interest as per the evaluation of Deustche bank are specifically identified after analyzing the situation of the U.S money along with the capital market instead of being ordered by the lenders. The investors follow the terms mentioned by the government and in spite of problems; U.S is capable of handling its external deficit with its own currency (Schneider, 2004). Such an easy and comfortable finance management technique helps the U.S economy to sustain in spite of suffering form account deficits.
Economists like Milton Friedman mentioned that U.S is suffering from deficit as the foreigners constantly desire to invest in the country. Thus after researching on the given topic it may be inferred that though there are chances of shifting investment to other countries due to the financial deficit condition, however in reality such chances of shifting to other places for capital investment is little as U.S offers extraordinary returns and such high return on investment is a huge advantage for any business. Thus since the alternative of investing is limited and investing in Asian countries such as Japan or China demands adhering to localized strategies and also following unique policies for business enhancement. Such restrictions are not there in U.S, besides this return in dollar ensures high return when invested. Therefore it may be inferred that in spite of various issues regarding the deficit in account, U.S will still remain as investors preferred destination.
2. It is possible that the persistence of the US deficits in the current and payments accounts can be adjusted without bringing about economic recession or crisis. Thought, this is not the easy prospect yet it can be said that the situation is not some hypothetical. It is true that the persistence of US deficits which is coupled with the enhancing international debt might pose a threat on the financial system of the country. There are some of the issues which have further aggravated the treat of rescission, such as the disparity of the economic growth, as compared to other economies of the world the US economy grows at a faster level owing to the productive factors of the nation and demographic aspects, therefore it can be said that the growth potentials of the economy can be proved to be harmful if not managed properly (Schneider, 2004).
Another factor which is to be monitored properly apart from the growth disparity of the nation it is the over the fear of resulting external deficits. There is a probability that due to the external deficits causing from the factors such as the high elasticity resulting from the imports, then the increase reliance of the outsourcing factors and industrial cooperation and the function of dollars in relation to the global currency reserve (Quora.com, 2015). Therefore, in respect it can be said basing on the economic theories that a slow and steady deduction in the current account deficit would help protect the economy from facing any recessions or the financial crunch. Moreover, the structure of the Gross Domestic Product of the nation is of ample importance for nation due to the fact that a considerable portion of it is the resulting from lending to the international banks due to the other foreign investments.
It is true that the reduction of the value of dollar would have an adverse effect on the part of financing yet it would not pose a threat for the balance of payment deficits. Moreover, it cannot be denied that from the angle of economic growth the US has always been an example for the other from the view of the effective resource utilizations and its management of the financial system, yet the financial crisis of 2007 has been a major setback for the nation (Iie.com, 2015). However, from the major setback the nation has further strengthened the hold over the financial aspects of the country so that it would be able to exercise control over the financial factors and help the economy from the any devastating recession (Economicshelp.org, 2015). Therefore, it can be said that though the U.S. deficits in the current and payments accounts is persistent but it is possible that the same can be adjusted without bringing about economic recession or crisis.
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