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Is The U.S. Current Account Sustainable

Essay by 24  •  November 16, 2010  •  522 Words (3 Pages)  •  735 Views

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For the past quarter century, the U.S. has consistently run current account deficits year by year. Consequently, the aggregate of these deficits has transformed the U.S. from being the world’s largest net creditor to its largest debtor. Recently, the U.S. fiscal and current account deficits have reached unprecedented levels for a major economy. Economists have begun to argue about whether or not it has reached an unsustainable level and how much more the deficit is expected to grow. In answering this question, one must first define sustainability and analyze today’s economy given this definition. With the U.S. absorbing a majority of the current account surpluses from major foreign countries like China and Japan, government deficit overtaking investment in the U.S. current account, and rising interest payments on the United States’ growing external debt, it is only a matter of time before our economy collapses in on itself and could potentially cause a worldwide crisis.

So how do we define sustainability? Kouparitsas gives an official definition in the recent Chicago Fed Letter. “When economists want to assess sustainability of the current account, they begin by calculating the net exports to GDP ratio that would be required to maintain the current net foreign assets to GDP ratio, NFA*. I refer to this as the critical net exports to GDP ratio, NX*. Net exports to GDP ratios above NX* will increase the nation’s net foreign assets to GDP ratio above NFA*, while net exports to GDP ratios below NX* will decrease it. NFA refers to the U.S. net foreign asset position: The value of assets owned by U.S. residents held abroad (A) minus the value of U.S. liabilities to the rest of the world (D) is called the U.S. net foreign asset position (NFA). If its net foreign asset position is positive (NFA > 0), the U.S. is a net creditor to the rest of the world. Conversely, if NFA is negative (NFA <

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