THE U.

S Current
Account Deficit
 Table of Content

Table of Content................................................................................................................2
I. Background................................................................................................................3
a. A historical perspective on U.S. External Balances...........................................................3
b. Balance of Payment and Deficit Current account..............................................................8
II. Problem Situation.....................................................................................................12
III. Solution................................................................................................................14
a. Policies to rectify a Deficit Current Account....................................................................14
b. The Analysis into The U.S. Current Account Deficit.......................................................17
IV. Conclusion............................................................................................................22
V. References................................................................................................................23
I. Background
a. A historical perspective on U.S. External Balances
The Gold Standard (1870-1914)
The most perfect monetary system humans have yet created was the world gold
standard system of the late 19th century, roughly 1870-1914. Contrary to
popular belief, people generally did not conduct commerce with gold coins.
Yes, gold coins existed, but people mostly used paper banknotes and bank
transfers, just as they do today. In 1910, gold coins comprised $591 million out
of total currency (base money) of $3,149 million in the United States, or 18.7%.
These gold coins were probably not used actively, and served more as a savings
device, in a coffee can for example.
The global gold standard, which fixed major currencies against one another –
and which the United State joined in 1879 – encouraged these high levels of
capital mobility. In 1879, global holdings of foreign assets were estimated at
approximately 7% of world GDP. This rose quickly to close to 20% in 1900-
1914. U.S. adherence to the gold standard, however, generated opposition at
home. Pegging the dollar to gold caused intermittent deflations, which increased
the real value of loan repayment. Eastern bankers benefitted while Western and
Southern farmers and other borrowers were harmed. A large faction of the
Democratic Party, often called “populist”, pressed for the United States to
abandon gold in favor of a de facto silver standard. Although the movement was
ultimately unsuccessful, speculators put pressure on the dollar in anticipation of
an eventual departure from the gold standard. Between 1891 and 1897, the U.S.
Treasury was forced to deter continued speculative dollar sales and maintain the
fixed exchange rate by increasing interest rates dramatically. This resulted in a
harsh recession.
The interwar Period (1914 – 1939)
After the commencement of World War I in 1914, ownership/holding of the
asset in the world is changing dramatically. The gold standard was canceled,
and monetary policies throughout the world became directed towards domestic
goals, such as the war budget through approval and money scores. Countries
that trade in international trade and investment through tariffs and capital
controls.
The U.S. returned to the gold standard in 1919, and other European countries
and Japan reinstated the gold parity a couple years later. Considering the limited
gold supply of the early 1920s, the European countries and Japan decided on a
partial gold standard, where reserves consisted of partly gold and partly other
countries’ currencies. This standard is known as the gold exchange standard.
These countries attempted to restore the gold standard in 1918 at the end of
World War I, but for the most part, their attempts remained unsuccessful. One
reason for the lack of success is that efforts were mostly unilateral. It means that
countries decided about post-WWI parities without consulting each other.
This tendency to unilateralism had its own reasons. Post–World War I inflation
rates varied among countries, depending on how much they inflated the
economy during the war. But some countries chose their pre–World War I gold
parity even though their post–World War I inflation rates were much higher
than those of the prewar period.
Britain was one country that went back to its pre–World War I parity, even
though the post-war price level was higher than the prewar price level. To avoid
further problems with the gold parity, Britain implemented a monetary policy of
higher interest rates (or lower quantity of money, essentially a contractionary
monetary policy), which led to a weak output performance and unemployment
in the years following the end of World War I.
Another important event after World War I later affected the decisions made
during the Bretton Woods conference of 1944. As in the case of other countries,
Germany suspended gold convertibility in 1914. However, unlike other
countries, it couldn’t return to the gold standard after World War I. Even though
Germany recovered from hyperinflation during the National Socialist regime,
that very regime led to World War II in 1939. The imposition of heavy
reparations payments on Germany was noted as a mistake during the Bretton
Woods conference in 1944.
Therefore, as far as the gold standard is concerned, the interwar period started
on the wrong foot. Three fundamental problems characterized the interwar era
from the beginning:
 The post–World War I gold parities weren’t consistent with the post-war
price levels.
  Aware of the first problem, and in an attempt to maintain the external
balance (to keep the fixed exchange rates and not lose gold reserves),
central banks in many countries implemented contractionary monetary
policies, which led to output decline and unemployment.
 Despite the fact that a metallic standard requires a good amount of
cooperation, the international monetary system of the interwar years
cannot be described as such a system.
During the Depression era (1925–1931), a series of disastrous financial events
affected almost all major countries. Examples of such events are the October
1929 New York stock market crash and bank failures around the world,
especially in Austria and Germany in the early 1930s.
The Bretton Wood System (1950 – 1971)
Bretton Woods established a system of payments based on the dollar, which
defined all currencies in relation to the dollar, itself convertible into gold, and
above all, "as good as gold" for trade. U.S. currency was now effectively the
world currency, the standard to which every other currency was pegged.
The Bretton Woods system is the landmark for monetary and exchange
rate management established in 1944. The Bretton Woods system was
developed at the United Nations Monetary and Financial Conference held in
Bretton Woods, New Hampshire, from July 1 to July 22, 1944.
The Bretton Wood System established the International Monetary Fund (IMF)
to oversee the International economic order. The IMF was empowered to
arrange short-term loans between countries. The Bretton Woods system also
established the World Bank, which was empowered to make longer-term loans
to developing countries. Today the World Bank and IMF continue their central
roles in international financial affairs.
The Bretton Wood system as based on mutual agreements about what countries
would do when experiencing balance of payments surpluses or deficits. It was
essentially a fixed exchange rate system. For example, the exchange rate of the
dollar for the British pound was set at slightly over $4 to the pound.
The Bretton Wood system was not based on a gold standard. When countries
experienced a balance of payment surplus or deficit, they did not necessarily
 buy or sell gold to stabilize the price of their currency. Instead they bought and
sold other currencies.
One difficulty with the Bretton Wood System was a shortage of official reserves
and international liquidity. To offset that shortage, the IMF was empowered to
create a type of international money called Special Drawing Rights (SDRs).
However, SDRs never became established as an international currency and the
US dollar kept serving as official reserves for individual and countries. Since
countries could exchange the dollar for gold at a fixed price, the use of dollar as
a reserve currency meant that, under the Bretton Wood System, the world was
on a gold standard once removed.
Twin Deficits Post 1980s
The goods and services trade deficit, which had fluctuated between -0.5% and
-3.1% of GDP since 1980, began to increase after 1996. The Asian financial
crisis caused foreign investors to use the US as a safe haven, with the lending
that ensued contributing to a larger trade deficit. China also began to
accumulate official foreign reserve holdings of dollar denominated assets,
leading to concerns about US dependence on Chinese financing and an
undervalued Yuan. The trade deficit peaked at -5.5% of GDP in 2005 and 2006.
With the fiscal and trade deficit both rising, potential danger of the twin deficits
heightened. A specific concern was that slowing, let alone cessation, in foreign
financial inflows might throw the US economy into a tailspin.
The 10-year run of rising trade deficits relative to GDP ended with the onset of
the financial crisis and the great recession that began in 2008. The fiscal deficit
tripled, while the trade deficit shrank, opening a large gap between them. Key
factors were a collapse in investment and increase in private saving. Net
domestic investment declined from 7.0% to 1.4% of GDP between 2007 and
2009, while net private savings increased from 4.7% to 8.5% of GDP. As a
slow economic recovery gained strength, the fiscal deficit declined, with the
twin deficits settling at similar, more moderate levels in 2013 through 20171.

New Economy of the late 1990s

1
Zulauf, C. and D. Orden. “America’s Twin Deficits since 1980.” farmdoc daily (9): 14, Department of
Agricultural and Consumer Economics, University of Illinois at Urbana Champaign, January 25, 2019.
Sluggish economic, employment and wage growth marked the period from 1991
to 1995. In comparison, accelerated employment, productivity and wage
growth, as well as faster investment and consumption growth were
characteristic in the later 1990s through to the end of 2000.
Consumption is both the largest component of GDP and a leading indicator for
future investment. Consumption as a share of GDP grew steadily throughout the
1990s to more than 68% by 2000. Investment increased only after consumption
had grown for some time.
Three factors contributed to faster consumption growth in the 1990s.
1. Incomes grew due to faster employment and faster wage growth in
the second half of the 1990s, following falling unemployment rates.
2. Consumption was driven by rapidly rising stock prices. Reasonable
estimates suggest that as much as 84% of the increase in consumption
between 1997 and 1999 were due to the run-up in stock prices. With a
sharp decline in the value of the stock market since early 2000, the
so-called wealth effect also disappeared.
3. Faster consumption growth depended on more consumer debt.
Escalating Current Account Deficits (2000-2005)
In 1997, the Asian financial crisis struck and led to a large loss on investor
confidence in Asian economies and other developing countries. The United
States became relatively more attractive to investors and so the pace of decline
in the current account quickened with the extra capital inflow to the States.
There was a brief respite in the decline in current account balance in 2000–01 as
the dot com investment boom came to an end. But the ensuing slump
encouraged a monetary and fiscal easing. From 2001 onwards there was a
growing trend towards large public dis-saving in the United States brought
about by a series of growing fiscal deficits. These deficits were due to a weak
economy, lower tax rates and increased government spending, especially on the
war in Iraq.
The U.S. current account deficit essentially is a reflection of the fact that U.S.
expenditure exceeds its income. Escalating federal budget deficits, an anemic
national savings rate, and widening trade deficits all interact to produce a
ballooning dependence on large inflows of money from abroad. Edwards points
out that a number of experts are particularly concerned that the reliance on
 foreign central banks, especially those in Asian countries, to purchase U.S.
Treasury securities has made America extremely "vulnerable to sudden changes
in expectations and economic sentiments."
"Never in the history of modern economics has a large industrial country run
persistent current account deficits of the magnitude posted by the U.S. since
2000," Edwards writes. Edwards acknowledges that, in part, the current account
predicament is a reflection of the fact that the United States sits at the center of
an "international financial system where its assets have been in high demand."
But he points out that its record-setting account deficit "also suggests that the
U.S. is moving into uncharted waters."
In other words, even if the United States has special status in the global
economy and is a very attractive place to park one's money, foreign investors
are unlikely to keep propping up U.S. trade and budget imbalances and spending
sprees indefinitely. Edwards describes a potential future in which the demand
for U.S. assets continues to increase for the next four years until the value of
foreign holdings peaks at 60 percent of GDP, but then falls back to 50 percent
by 2010.
A partially Flexible Exchange
International monetary affairs were much in the news in the early 1970s as
countries groped for a new exchange system. Under the present partially flexible
exchange rate system, countries must continually decide when a balance of
payments surplus and deficit is a temporary phenomenon and when it is a signal
of a fundamental imbalance. However, if they believe that the balance of
payments imbalance is fundamental one, they let the exchange rate rise or fall.
b. Balance of Payment and Deficit Current account
Balance of Payments (BOP)
BOP also known as balance of international payments, summarizes all
transactions that a country's individuals, companies, and government bodies
complete with individuals, companies, and government bodies outside the
country. These transactions consist of imports and exports of goods, services,
and capital, as well as transfer payments, such as foreign aid and remittances.
A country's balance of payments and its net international investment position
together constitute its international accounts. The balance of payments divides
transactions in two accounts: the current account and the capital account.
Sometimes the capital account is called the financial account, with a separate,
usually very small, capital account listed separately. The current account
includes transactions in goods, services, investment income, and current
transfers. The capital account, broadly defined, includes transactions in financial
instruments and central bank reserves. Narrowly defined, it includes only
transactions in financial instruments. The current account is included in
calculations of national output, while the capital account is not.
The sum of all transactions recorded in the balance of payments must be zero, as
long as the capital account is defined broadly. The reason is that every credit
appearing in the current account has a corresponding debit in the capital
account, and vice-versa. If a country exports an item (a current account
transaction), it effectively imports foreign capital when that item is paid for (a
capital account transaction). If a country cannot fund its imports through exports
of capital, it must do so by running down its reserves. This situation is often
referred to as a balance of payments deficit, using the narrow definition of the
capital account that excludes central bank reserves. In reality, however, the
broadly defined balance of payments must add up to zero by definition. In
practice, statistical discrepancies arise due to the difficulty of accurately
counting every transaction between an economy and the rest of the world,
including discrepancies caused by foreign currency translations.
Balance of payments and international investment position data are critical in
formulating national and international economic policy. Certain aspects of the
balance of payments data, such as payment imbalances and foreign direct
investment, are key issues that a nation's policymakers seek to address.
Economic policies are often targeted at specific objectives that, in turn, impact
the balance of payments. For example, one country might adopt policies
specifically designed to attract foreign investment in a particular sector, while
another might attempt to keep its currency at an artificially low level in order to
stimulate exports and build up its currency reserves. The impact of these
policies is ultimately captured in the balance of payments data.
Factors of Deficit Current Account
Current account is the part of the balance of payments account in which all short
-term flows of payments are listed. The US government can influence the
exchange rate by buying and selling official reserves.

Figure 1. Contributor of Current Account

Factors which cause a Deficit current account when the value of imports (of
goods, services, and investment income) is greater than the value of exports
within period of time. There are many factors which lead to deficit current
account.
 Overvalued Exchange Rate
When the currency is overvalued and make imports become cheaper,
this will shift the demand curve shift out so that the higher quantity of
imports will take place. Export activities will become uncompetitive
and the quantity will be fall as well.
 Economic Growth
When there is an increase in national income, people will tend to have
more spending for the consumer goods. If domestic product can’t
fulfill the demand, people will seek an alternative thru an import.
Therefore if there is fast economic growth which not subsequently
followed by incremental of domestic supply, there tends to be a
significant increase in the quantity of imports and a deterioration in the
current account to be deficit.
 Decline in competitiveness/export sector
 If there is a decline in the exporting manufacturing sector since it has
struggled to compete with other developing countries, this has led to a
persistent deficit current account.

 Higher Inflation
When the inflation rises faster than other countries, it will make export
become less competitive. This will lead also to deterioration of the
current account. However, inflation may also lead to a depreciation in
the currency to offset this decline in competitiveness.
 Recession in other countries
When US main trading partner experiencing a negative economic
growth, this will also impacted to country’s export activities by
reduction number of export.
 Borrowing money
If the countries are borrowing money to invest or maybe to fulfill
domestic goods through an import, this will lead also to deterioration
in the current account position.
 Financial flows to finance current account deficit
When a country able to attract more financial flows (either short-term
or long term FDI), these flows on the financial account will lead the
country to have a larger deficit current account.
 II. Problem Situation
Few economic questions in recent times have challenged policymakers and
economist the world over quite as much as the US current account deficit.
Some worry that it is a global economic time bomb. More recently, a
contrasting argument has emerged that dismisses the deficit is harmless.
However most serious experts simply agree that the present situation is
unsustainable. Figure 1 below shows the current account deficit and its main
component as a share of US GDP since 1973-2011. In addition to that also
shown the real exchange value of the dollar, which is the international asset
price companion to the current account. The real exchange value of the dollar
also has exhibited large swings, most notably the appreciation-depreciation
cycle of the mid-1980s. In the 1990s, the dollar gas appreciated significantly as
well. While the table 1 below shows the magnitude in dollar terms selected
years of these main balances, along with the remaining two components of the
current account : net income payments on the net international investment
position (NIIP) and unilateral transfer (such as US grants to foreign countries
and private remittances)2.

Figure 2. Overview of the External Deficits and the Dollar3

2
Mann, C.L (2002). Perspectives on the US current account deficit and sustainability. Journal of Economic
Perspectives, Page 132.
3
External Balances: Bureau of Economic Analysis, Department of Commerce; http://www.bea.doc.gov. Real
exchange rate: Federal Reserve Board; http://www.federalreserve.gov.
 Table 1. United States external balance and components (billions of dollars)
One consequence of the change in the NIIP can be seen in the net income line in
table 1 above. When the NIIP was positive in the early 1980s, a goods and
series trade deficit of $19 billion was offset by net income of $ 30 billion from
foreign investments. As the NIIP in opposite position, the net income balance
became smaller but still in a positive $14 billion in 2001. So how dangerous is
the US current account deficit? What are the macroeconomic policies
intervention by government of the US to overcome the situation? And what are
the macroeconomic variable that have significant impact on the deficit current
account?
III. Solution
a. A Theory : Policies to rectify a Deficit Current Account
 Contractionary Monetary/Fiscal Policies
When Deficit current account in the US mostly due to the high demand
in the domestic economy due to income of most people in the US is very
high as well, so that lead to enormous number of import. Government
able to intervene by reducing/shifting in the aggregate demand through :
Contractionary Policies
Fiscal Policies Monetary Policies
 Increase Taxation  Increase Interest Rate
 Reduce Government Spending  Lowering Money Supply
Pric e AD/ AS Inte re s t
Money Market
le ve l Rate
LAS
M0

E i1
P0
i0
P1

Gap
AD
Q1 Q0 Re al Q1 Q0 Q o f Mo ne y
o utput

The main issue with using monetary policy to reduce a current account
deficit is by the incremental of interest rate will tend to lead hot money
flows (capital flows moving to countries with higher interest rates and/or
expected changes in exchange rates) and cause exchange rate
appreciation will potentially worsening the current account.
In the other hand, the deflationary fiscal policies will conflict with other
macroeconomic objectives which lead to economic growth to fall and
causing higher unemployment. A government is unlikely want to risk
higher unemployment to only reducing a deficit current account. Thus,
 fiscal or monetary policies approach will only work depend on the
standard and definition on initial economy condition of the countries, the
size multiplier effect, level confident of consumer, income growth
confident, etc.

 Protectionist Measures
Trade protectionism is a policy that protects domestic industries from
foreign competition, let say when the input prices is to low and lead the
country’s demanding import so high. So that the government need to
protect the domestic industries by utilizing at least four primary tools
such as tariffs, subsidies, and quotas. This policies will also has another
advantage to gives the new industry’s companies time to develop their
own competitive advantages as well as creates jobs temporarily for
domestic workers.
This is a politically motivated defensive measure that have potential
negative sides such as retaliation and imported inflation face lower
competition. This policies will work in the short run, yet very destructive
in the long run.
The most common protectionist strategy is to enact tax imports tariffs
which will raise the price of imported goods. In this case, the imported
goods will become less competitive compared to local goods. In the
chart below shows the share of tariffs collected on US imports since
1790. Tariffs hit a record 57.3% in 1830 due to the tariff of
abominations and hit the lowest in 2018 at 1.2%.
 Figure 3. Tariffs on US Import as a Share of Total Imports Value
Others protectionist strategy that frequently used by the Government of
US is Subsidize local industries to help them compete in the most global
market. Subsidies come in the form of direct payments or tax credits.
Enacting price flooring (usually in the agriculture industries) also can be
considered as government subsidize. This will allows producers to lower
the price of local goods and services which makes the products become
cheaper even when shipped overseas as export commodities. However,
sometimes subsidies can have the opposite effect. When the government
wanted to control the supply and increase prices, farmers could also let
their fields rest and regain nutrients due to overproduction. This helped
the agriculture industry but raised food costs during the depression4.
The third method is to impose quotas on imported goods. Some
economist says that this approach is more effective than tariffs and
subsidize. No matter how low a foreign country sets the price through
subsidies, it can’t ship more goods.
The bottom line in the global economy, Although this initiatives are able
to rectify the deficit current account, protectionism policies less
preferred since its damaging everyone. Trump’s “America First”
economic policy could hurt he US economy in the long run. Tariff
imposition on imports from China, Canada, Europe and many other
countries will also have triggered retaliatory tariffs. A trade war with

4
https://www.thebalance.com/what-is-trade-protectionism-3305896
 these large economies leads to serious consequences for US exporters
and the labor force as well as will create inflation in the domestic market
due to higher prices from import goods and services.
 Allow Currency to Depreciate
Currency manipulation by allowing currency to depreciate can be
considered as a subtle act so that many textbooks is omitting the
deliberation attempt of a country to lower its currency value. Surely, this
would make its exports cheaper and more competitive. US government
have been criticized by creating so much national debt that has the same
effect of lowering US dollar decline.
 Supply Side Policies
Supply side policies able to improve the competitiveness of the economy
and make exports more attractive. This approach will be expected can
improve the current account position but this approach will need
considerable time to bring out the effect to the country’s current account.
For instance, if the government pursued a policy of privatisation and
deregulation, it may increase the efficiency of the economy since the
profit motive in the private sector which can be translated into lower
costs of production and lead to boost up country’s export.
b. The Analysis Solution into The U.S. Current Account Deficit
As mentioned in earlier section, current account deficit measures the balance of
trade a country is importing more than country’s export for goods, services, and
net investment income & transfers.

Figure 4. Factors influencing deficit current account

 Comparing to the divergence in growth rates in regards of global current
account imbalances, US has shown that the trend lead to the largest deficit
current account. The increases that have taken place in the past year largely
reflect the cyclical growth differential between the US and its major trading
partner (China), and the rise in the crude oil price.
A more detailed look at the composition of trade in goods and services in the
figure 4 below shows that some sectors are characterized by cyclical fluctuation,
whereas for others a trend is apparent. The “end-use” categories compiled by the
Bureau of Economic Analysis of US department of commerce combines some
of these categories into 3 sectors : capital goods and nonenergy industry
supplies; consumer goods and autos: and services. The trade surplus on capital
goods and nonenergy industrial supplies fluctuates with the business cycle. In
contrast, the trade balance for consumer goods and autos have been persistently
and increasingly negative but for services have been persistently positive.

Figure 4. US Trade balance by sector, 1979-2012 (billion US$)5

5
Adapted from BEA, table 4.2.5
 Figure 5. US Imported crude oil prices 1980-20126
The US deficit current account mechanism by which real resources are
transferred from the rest of the world as the counterpart of foreign net purchases
of US financial and other assets. US nowadays is the central position of the
world’s financial system which US alone can borrow in its own currency, for
instance, issue dollar denominated debt. Since US is never going to run out of
dollars, it can always avoid outright defaults on its government’s debt if only
because the FED can always step in to buy back the US treasury bond held by
foreigners7.
Although foreign creditors see no default risk in holding the US treasury bonds,
the would balk at a substantial loss in the dollar’s real purchasing power, or
substantial devaluations of the dollar against several other currencies that reduce
the dollar’s purchasing power elsewhere. Foreign central banks would no longer
be so anxious to stop their currencies from appreciating against the dollar and
would withdraw from being dominant buyers of the US treasures8.
Some economist have varying opinions to the deficit current account condition.
The argumentation raised not to worry with the deficit current account because
if a deficit current account is due to finance long term capital inflows, this
potentially will have a beneficial effect and increase the productive capacity for
the economy in the future. During globalization period, it is much easier to
attract sufficient capital flow to finance the deficit. If the deficit gets larger, it
6
EIA, (2013). Refiner average imported crude oil acquisition cost historical series, Global financial data for
prices.
7
Mckinnon, Ronald.I. (2007). The US current account deficits and the dollar standard’s sustainability : a
monetary approach. Stanford University. CESifo Forum 2007. Page 13.
8
Ibid, page 14.
 will cause to the devaluation and will helps to reduce the deficit. Also when
there is a slowdown in consumer spending, the deficit will fall naturally. Some
economist also agree that deficit current account also overcome domestic
demand problem and able to prevent inflation.
In the other hand, some economists have their own reason why a country need
to worry to the deficit current account. Firstly, there could be problems
financing deficit in the long term. A short term deficit is not a big deal, but if a
country has a deficit of over 6% of GDP, then it’s become a problem when a
country rely on Capital flows only9. A significant part of the current account
deficit in US is financed by Chinese investors who buy US securities at
relatively low interest rates. Furthermore, US deficit current account, which
now act as Bank to the world, will lead a problem for most countries to be not
able to borrow such large amounts at low interest rates. US need to maintain
their credibility to keep their investors, since if the US economy change lead to
investor lose their confidence in the US economy, they will stop buying debt
and generate at least 2 main problems :
a. US interest rates will be risen to attract enough people to but the debt and
surely will reduce demand in economy. This higher interest rates will also
particularly hurt American consumers who have large amounts of debt at the
moment.
b. If capital flows can’t be attracted, then the dollar will continue to devaluate.
This could cause inflationary pressures.
Basically to fix the deficit would be a painful experience for the US economy.
In this case, large extent of US deficit current account are caused by excessive
spending in the economy which partly due to government borrowing to
increases aggregate demand in the economy. A huge deficit current account is
often indicated as a sign of an unbalanced economy. It could be a sign of
structural weakness and an uncompetitive manufacturing sector. This is a
problem in the Eurozone where the exchanges rates are permanently fixed.
Deficit current account can be interpreted as an increase of foreign liability. In
the beginning, this can be assume as simply deficit on buying goods or services.
However, over time, the deficit will be increased by the interest payment on the
capital surplus. Foreigner who invest their money in the US are eligible to
9
https://econ.economicshelp.org/2007/03/does-current-account-deficit-matter.html
 receive interest payment or dividends. this means that in the future, US
economy will need to attract capital flows just to pay off the investment income
as well as the deficit on goods and services.
Factors affecting US deficit current account : An Empirical Evidence
A study done in 2016 by Ghassem A. Homaifar and Abul Hasnat Muhammad
salimullah at Jones College of Business Tennessee to determine the effect of the
major macroeconomic indicators on US deficit current account using the
quarterly data from January 1973 to April 2013 which examine whether those
factors are truly the cause of massive current account deficit in the US.
Considerable variable such as inflation rate, interest rate, exchange rate, and the
gross domestic product growth rate. The study found the presence of
autocorrelation, the ordinary least square (OLS) coefficients having the right
signs, and are statistically significant. Furthermore, the study conducted the
ARMA model to remedy the problem associated with OLS and performed
CUSUM test, QLR test, and the test for serial correlation. The study estimation
results suggest that an increase in GDP growth rate, inflation rate and a decrease
in the interest rate causes the country’s import to exceed exports. While the
trade-weighted US dollar index as a measure of exchange rate did not generate
any significant impact on the deficit current account in the study estimation
result10.

10
Homaifar, G.A, Salimullah, Abul HM, (2016), Factors affecting US current account deficit : An Empirical
Evidence, Journal of Economics and International Finance, DOI: 10.5897/JEIF2016.0786
IV. Conclusion
In this article we have mentioned several practical solution to fix deficit current
account. Several macroeconomics theory approach can be done by government to
reverse 180 degree current account or at least to reduce the deficit number by
contractionary monetary/fiscal policies, protectionist measures, currency
depreciation, and supply side policies .However each approached have their own
consequences that need to be considered further depending the initial economy
condition. In addition, An empirical study also have been done to look at factors
affecting US deficit current account which resulting that considerable variable such
as GDP growth, inflation rate, and a decrease in the interest rate will have the
country’s import to exceed export while exchange rate not generate any significant
impact to the deficit current account in the US.
US financial markets serving as a world financial intermediary which just as a bank,
or a mutual fund, channels the savings of many individuals toward productive
investment, The US financial markets play a similar role for many investors from
around the world.
So how dangerous is the US deficit current account? US now has become a “net
debtor” nation, and that this situation increases the risk that currency depreciation
might lead to financial crisis. The word “debtor” sometime can be misleading in this
context, for US assets owned by foreigners include equities and physical capital
located in the US, in addition to bonds issued by US entities. In fact, about 95% of
international claims on the US are denominated in dollars. A country with most of
its debts denominated in its own currency is in a very different situation from one
whose debt is denominated in other currencies.
The US situation is completely different. To extent that the foreign exchange value
of the dollar declines, the effect on the values of US and foreign asset holdings
works not as an accelerator of crisis, but as part of a self-correcting mechanism.
Moreover, the central role of US financial markets, and of the dollar, in the world
economy suggest that capital account surpluses and therefore current account
deficits, are being driven primarily by foreign demand for US assets rather than by
any structural imbalance in the US economy itself.