Understanding the US trade deficit by Philipp Damocles The US trade deficit has been a cause for much debate In recent years. Most people recognize that a trade deficit has a negative connotation, but many cannot articulate why. US trade deficits form by far the largest chunk of the current account deficit, which is a measure of how much more Americans spend than they earn. Current account deficits have increased steadily every year since 1991, and are currently running in the region of $800 billion to $900 billion per year.

Effectively, this means that as a action every year we spend $800 to $900 billion more than we earn; we are accumulating debt at an astounding pace. This doesn’t have to be a bad thing, provided the US uses the money it borrows to Invest in productive assets. Unfortunately, this doesn’t seem to be the case. According to financial analyst Martin Wolf, 91% of US borrowing goes to unproductive consumer spending. It probably shouldn’t come as a surprise that the US appears to be stuck In a spending rut that it can’t get out of.

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There are a couple of factors that that are endemic to the world’s economic and financial systems that propagate this pattern. The first is the fact that for many developing countries, the US is a major driver of export-led growth. Countries such as China, Japan, Thailand, and many others rely on the vast and relatively wealthy consumer classes of the united States to buy their goods, thus helping their own economies grow rapidly. Sometimes, these nations will manipulate their currencies in order to be able to sell their goods more cheaply in the US, relative to goods manufactured here.

In an Ideal ‘free trade’ world, this kind of manipulation wouldn’t exist, but we don’t live In that kind of a world (far from It). As the economies of rapidly developing nations grow, their manufacturing costs should rise and their currencies should appreciate, diminishing the initial competitive advantage that they had. In a country where prices and the currency can be controlled, this probably won’t happen if the US is a major export destination. The second factor is the fact that the dollar is the world’s most widely used currency.

Its dominance is so complete, in fact, that the US is the only country that is able to borrow from other nations in its own currency. This may not sound significant at first, until you realize the obvious: if we can borrow in our own currency, then we can repay debt by simply printing more money. No other country in the world is able to do this – the famous French statesman Charles De Gaulle once (correctly) referred to this as “America’s exorbitant privilege. ” This greatly reduces the Incentive for the US to undertake any policy to reduce spending on foreign goods. Lee tense Doctors malign explain winy ten use’s trace dialect exists Ana winy It’s so persistent, we still haven’t made a value Judgment on it. Many economists and financiers are starting to, or have already, expressed concern over the fact that America can’t seem to stop spending more than it earns. Earlier this year, Warren Buffet described the situation as analogous to a fantastically wealthy family living on a large farm and that is slowly selling off bits and pieces of the farm to pay for its lavish lifestyle.

Even though the sliding dollar has made our exports a little more competitive, the underlying behavior hasn’t changed. If something doesn’t happen to make the US spend less and save more, or to make foreigners spend more and save less, at some point in the near future our debt will stretch the limits of credibility. Foreigners won’t be willing to lend any more and they might call our tab. If that happens, we might very well see a flight from the dollar standard and economic problems severe enough to permanently reduce the Use’s status in the world. Let’s hope it doesn’t come to that.