What matters to a nation's economic health is not the difference between exports and imports but the degree to which its citizens are free to trade and invest across international borders. When citizens are allowed to buy and sell goods, services, and investment assets freely in the international marketplace, a nation's productive resources will tend to flow to the best and highest use, raising the nation's overall standard of living.U.S. Embassy Japan - 2005
A new study has found that the United States' growing trade deficit with China has had an increasingly negative impact on the U.S. economy, causing job losses that reach into the most technologically advanced industries in the manufacturing sector and affect every state, according to a January 11 press release by the U.S.-China Economic and Security Review Commission (USCC).ﾂDr. Don Boudreaux; George Mason University - 2005
The real problem is neither the nationality of America's creditors nor the size of the current-account deficit. It’s government irresponsibility -- irresponsibility that results in excessive government spending and sub-optimal means of financing this spending.Alan Greenspan; Chairman, Federal Reserve - 2004
So far, foreigners are willing to lend the United States money to finance the current account imbalances, Greenspan pointed out. The worry, however, is that at some point foreigners might suddenly lose interest in holding dollar-denominated investments. That could cause foreigners to unload investments in U.S. stocks and bonds, sending their prices plunging and interest rates soaring.Dan Griswold; Cato Institue 2005
The sliding value of the U.S. dollar has made some private economists more concerned about this potential risk.
"It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said. "But when, through what channels and from what level of the dollar? Regrettably, no answer to those questions is convincing," he said.
Indeed, in seven of the eight years in which the U.S. current account deficit "improved," the U.S. unemployment rate went up. And in 13 of the 16 years in which the current account deficit "worsened," the unemployment rate went down.
The year 2004 appears to fit the pattern comfortably. Through the first three quarters of the year — January through September 2004 — the U.S. current account deficit averaged 5.5% of GDP, a 0.6 percentage point increase compared to 2003.
That would place 2004 somewhere between a moderate and rapid growth of the current account deficit. Befitting the pattern, economic performance in 2004 was also moderate to robust.
Scott Brown, PhD; Raymond James Chief Economist
The Current Account Deficit
Capital inflows are the mirror image of the current account deficit, which is mostly the trade deficit in goods and services. The current account deficit approached 6% of GDP at the end of 2004. While this gap is large, it’s not particularly bad by itself. However, cumulative deficits have led to a sharp rise in the country’s external debt – now more than 25% of GDP. Servicing this debt will exert a larger drag on the U.S. economy as interest rates rise. In an effort to keep their currencies from appreciating, Asian central banks have purchased considerable amounts of dollar assets in the last couple of years. However, the pace has been unsustainable. A reduction in the pace of capital inflows would, all else equal, weaken the dollar and lead to higher long-term interest rates in the United States.
So, who do you believe?