Professional Documents
Culture Documents
Current account
Exports and Imports of goods and services and income receipts
* Exports of goods and services
* Goods, balance of payments basis
* Services
* Transfers under U.S. military agency sales contracts
* Travel
* Passenger fares
* Other transportation
* Royalties and license fees
* Other private services
* U.S. Government miscellaneous services
* Income receipts
* Income receipts on U.S.-owned assets abroad
* Direct investment receipts
* Other private receipts
* U.S. Government receipts
* Compensation of employees
Unilateral current transfers, net
* U.S. Government grants
* U.S. Government pensions and other transfers
* Private remittances and other transfers
1
Zokirjon Abdusattarov, Institute for Law and Finance
There are a number of reasons why this issue has recently started
having increasing overtone. The current situation in the US is appalling: the
current account deficit has hit its record, which is 7 % of the GPD or 900
billion dollars. This amount is greater than sum of GDPs of roughly 100
developing countries or almost 2 % of the Gross World Product (based on the
World Bank calculations for 2006). It is the amount of money that has never
been observed in the US financial history (see figure 1.). The current account
deficit also reflects the surplus of imports over exports in the international
trade of the US. This shows that the US is losing its competitiveness and the
US economy is suffering, and the employment opportunities are going down.
And finally the greater the deficit becomes, the more observers subscribe to
the view that correction must take place some time in the future with
significant affects on the US and world economy.
3500000
3000000
2500000
Exports of goods and services
and income receipts
2000000
Imports of goods and services
and income payments &
Unilateral current transfers, net
1500000
Years
1000000
500000
0
19 60
19 64
19 68
19 72
19 76
19 80
19 84
19 88
19 92
19 96
20 00
20 01
20 02
20 03
20 04
20 05
20 06
Figure 1 illustrates that since the 1980s, the US trade balance has been in
deficit. The deficit significantly broadened during 1990ies when the US
2
Zokirjon Abdusattarov, Institute for Law and Finance
economy was experiencing boom and growing much faster than the world
economy attracting large stocks of international investments.
It should be noted that the international investment position of the US is
not an ingredient of the current account; nevertheless, it is immensely affected
by it since dividends and interests are, so to say, “exchanged” between the
US and world countries as a result of the foreign-owned assets in the US and
the US-owned assets abroad. In 1985 US foreign assets were almost equal to
foreign assets in the US. But due to high economic growth in 1990ies and
dramatic development of financial institutions globally, investing in the US
became very accessible and the latter was considered as “oasis of prosperity”
for foreign investors. In 2006 net international investment position of the US
spiked up to 2,5 trillion dollars. On this issue, Ferguson expresses the view
that “if current account deficits continue to boost the negative international
investment position, eventually the cost of servicing that position, which so far
has been quite modest, would rise to an unsustainable level”1. As a result the
US economy becomes very fragile and would be thrown to recession for
several years.
1
U.S. Current Account Deficit: Causes and Consequences: Remarks by Vice Chairman Roger
W. Ferguson, Jr. To the Economics Club of the University of North Carolina at Chapel Hill,
Chapel Hill, North Carolina, April 20, 2005
2
Ibid.
3
Zokirjon Abdusattarov, Institute for Law and Finance
The view that the US current account deficit stems from the parallel rise of
the US budget deficit is commonly addressed by the so called “twin deficits
hypothesis”, primarily a development of the 1980s. The basis that forms this
theory is the accounting identity that the current account balance equals
saving – investment:
CURRENT ACCOUNT BALANCE= S- I
Then it states that taking into account that the increase in the fiscal deficit
lowered public saving, this means that it also caused the national saving to
lower, thus leading to an analogous increase of the current account deficit. Of
course, this hypothesis presupposes that private saving and investment
remain constant and only public saving alters, which is something that hardly
happens in the real world, where all these factors constantly change and
adjust to changes.
A more complex version of the “twin deficits hypothesis” contends that
the increased fiscal deficit causes domestic demand to rise, then domestic
demand in turn drives interest rates higher relative to foreign interest rates.
This spread leads of course to increased investments from abroad, thus
raising the value of the dollar, which affects the current account deficit by
widening it.
While this hypothesis is valid in terms of theory, the empirical data
shows otherwise: The expansion of the fiscal deficit contradicts with the data
of 1990’s when the US was confronted with a simultaneous rise of the trade
deficit and budget surplus instead of deficit. Moreover, in an international
level, empirical data taken from the economies of Japan and Germany,
suggest the same that account surpluses can coexist with budget deficits.
Thus, we can conclude that the expansion of the fiscal deficit had rather little
contribution to the expansion of the account deficit of the USA.
4
Zokirjon Abdusattarov, Institute for Law and Finance
high interest rates account for the appreciation of the dollar and the resulting
decline in investment spending.
Yet, some researchers point out that various economic developments such
as the deterioration in private saving rates might just be an economic
response to big economic fundamental shocks. For example, a rise in the
value of housing combined with lower interest rates may lead to a shift in
household saving behavior and do not actually affect the US current account
deficit, at least to a large extent.
5
Zokirjon Abdusattarov, Institute for Law and Finance
During the past decades, the lift of significant barriers and constraints
in international flow and mobility of capital has resulted in an overall
enhancement of the outflow of funds from national saving to foreign
investments. The typical destination of these outflows is States that have a
steady financial and investor-friendly environment, that it ensures the
investors property rights and boasts good rates of returns. One of the most
popular destinations of the foreign capital fund is that fulfils all the above
criteria is the US,
The empirical data shows a reduced correlation between national
saving and investment rates which can be attributed to the fact that domestic
savings are vastly used to finance foreign investments.
The turn of the domestic capital towards foreign investment and in
particular, towards US assets, leads to a decrease in US interest rates that
represent the risk premium of the foreign investors for holding US assets.
The subsequent fall of the interest rates, increases the demand for US assets
and leads to a rise in the value of the dollar. Therefore, the current account
deficit expands.
6. The rice in oil prices
The on-going sharp rise in the oil price has had a major impact on US
economy. The US oil import bill has increased from 68 billion dollars back in
1999 to 180 billion dollars in just 5 years, an increase of 110 billion dollars
roughly.
Of course, part of this increase in oil bill, is due to an increasing
demand for oil, but most of it reflects increases in price than quantity of
imported oil. The consequence is an increase in the imports by 110 billion
dollars that puts negative pressure on the account balance.
6
Zokirjon Abdusattarov, Institute for Law and Finance
3
The graph is taken from
http://www.federalreserve.gov/boarddocs/Speeches/2005/20050420/default.htm#fig_6
7
Zokirjon Abdusattarov, Institute for Law and Finance
Possible remedies
8
Zokirjon Abdusattarov, Institute for Law and Finance