Magazine article Economic Trends

The Current Account and Dollar Depreciation

Magazine article Economic Trends

The Current Account and Dollar Depreciation

Article excerpt

The 2005, the U.S. current account deficit will reach an estimated $783 billion or about 6.3% of GDP. Globally, current account balances must sum to zero. Less obviously, at the national level, the current account must equal the financial flows account because a country that runs a current account deficit must finance it by a financial inflow. There are two possible causes for the large U.S. deficit: Either the U.S. has a high demand for current consumption, which it must finance by borrowing from the rest of the world, or the rest of the world desires to invest in U.S. assets, which implies that we must run a current account deficit.

Which scenario is more likely? If the U.S. is demanding higher levels of consumption, then the dollar's value might decrease when our residents must purchase foreign currency with dollars in order to buy foreign goods. On the other hand, foreigners' desire to invest in U.S. assets could have the contrary effect--causing the dollar to appreciate--because the demand for dollars would be stronger. A quick look at the data cannot distinguish one story from the other. …

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