The United States as a Debtor Nation: Risks and Policy by William Cline

By William Cline

The us has once more entered right into a interval of huge exterior imbalances. This time the present account deficit, at approximately 6 percentage of GDP in 2004, is far higher than within the final episode, whilst the deficit peaked at approximately 3.5 percentage of GDP in 1987. in addition, the deficit is on course to develop into considerably greater over the subsequent numerous years. This examine examines even if the big and growing to be present account deficit is an issue, and if this is the case, how the matter will be solved. A principal coverage end of this learn is that it's more and more vital that the us decrease its exterior present account deficit. This deficit is not any longer benign because it arguably was once within the overdue Nineties while it used to be financing excessive funding rather than excessive intake and massive govt dissaving.

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Countries with exceptionally large gross positions relative to GDP include Ireland (average of gross assets and gross liabilities equal to 845 percent of GDP in 2003), Switzerland (477 percent), the Netherlands (382 percent), Belgium (388 percent), and the United Kingdom (358 percent). In comparison, the average of gross assets and liabilities for the United States stood at 86 percent of GDP, lower than any other industrial country except Japan (65 percent). The 6. 7 percent of GDP (BEA 2005c).

For Portugal and Greece, a reasonable interpretation of the steep swing from creditor to debtor status is that the process of European integration, and especially the move to a single currency, meant a narrowing of costs of capital among European countries and a corresponding increase in investment in what was formerly the periphery of the European Union. A similar interpretation, perhaps augmented by an oil shock diagnosis, can be made regarding the case of Austria, which experienced its NIIP downswing mainly during the 1970s.

This interpreta­ tion can be augmented by the extra dose of capital inflows from China, Korea, and some other new-creditor countries, especially by the late 1990s and after, in part as a consequence of the dollar’s reserve currency role. The pessimistic interpretation for the United States, of course, is that for a long time it has been living beyond its means, and has had nearly limitless access to credit to do so. For Portugal and Greece, a reasonable interpretation of the steep swing from creditor to debtor status is that the process of European integration, and especially the move to a single currency, meant a narrowing of costs of capital among European countries and a corresponding increase in investment in what was formerly the periphery of the European Union.

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