In the second course in this series,
trade, migration, and exchange rates in a globalized world,
the globalization course, we might call it,
we talked about current accounts and we talked about what they tell you about a country.
So let's turn to the US current account and see what we can
learn about the US economy just by looking at this indicator,
again, letting the indicators tell us
a story about the country and its risks and opportunities.
So, here we have the current account balance in the United States.
Now, the current account is mainly the trade account,
mainly exports minus imports,
but it's got some other things, primary and secondary income.
And so, we find that the United States is a current account deficit country,
and it's a chronic current account deficit country.
Actually, the deficits began in the 1980s.
And you see the deficits got very large.
Before the crisis, they were a little bit smaller now.
That has to do with more US production of petroleum in particular.
But anyway, we see it as a chronic current account deficit country.
Now, what do we know about the United States if
we know that it has a chronic current account deficit?
There are big differences between
current account deficit and current account surplus countries.
And when we explore India and China later on,
or we explore Japan,
we're going to dig into these differences more.
But let's just explore what those current account deficits,
those chronic current account deficits tell us about the US economy.
Well, first of all, it tells us that the United States consumes more than it produces.
I call these countries big spenders in the globalization course.
They produce a certain GDP,
they consume it all,
and then they still have demand,
and they buy goods from other countries.
So, United States is a big consumer,
they consume more than they produce.
At the same time,
they can drive their own growth with domestic demand.
If the rest of the world went into crisis,
the United States would still be able to grow fairly well because domestic demand is big,
it's robust, it consumes the entire GDP and then some.
The dark side of the US deficits,
current account deficits now,
these are not fiscal current account deficits,
is that the United States need to borrow abroad in order to finance that deficit.
In other words, what's happening is,
it is importing, for instance,
more than it's exporting,
so the difference that it can't cover the things it can't pay for with its own exports.
It needs to borrow the money from foreign countries in order to pay for that.
This would go in. As you know from the previous course,
this would show up as a surplus on the financial account.
But the US does have that vulnerability to the willingness of other countries to
lend the money to finance their excess consumption at reasonable rates,
and this is a potential risk.
And their currencies, the currencies of current account deficit countries,
tend to fall as the deficit grows.
Now, the United States is a special currency because it's also
a reserve currency as we mentioned in the globalization course.
So that tends to keep it strong,
but there would be a tendency for the dollar to
depreciate because of the current account deficit.
So we see risks here for the United States,
risks for the United States itself,
as it has to borrow money from other countries even though they're happy to lend,
risks for the other countries that lend it money because they are then
exposed to the credit worthiness of the United States and the value of the dollar.
I'm showing you on this chart a picture of what the world looked
like in terms of current account deficits and surpluses in the period up to 2012,
and we looked at the same chart in the globalization course.
But you can see over here on the left,
where I have the big spenders,
you'll find the United States as a country
where the deficits are relatively large percent of GDP.
You also find Spain, Portugal, Greece,
Ireland, Iceland, the UK,
many of the countries that experienced real trouble in the financial crisis.
And this is a consequence of that growing debt.
As they borrow year after year from the rest of the world,
their debt gets bigger and bigger and bigger and at some point,
we never know exactly where it will be.
At some point, their system could become
unstable and the financial sector could experience a crisis.
So the United States,
as a current account deficit country,
is vulnerable to this kind of a dynamic.
On the other hand, for the rest of the world,
this tendency of the United States to consume more than it
produces is a very welcome source of the excess demand for them.
Here in this picture, you can see the biggest current account deficit countries.
In here, I'm showing their deficits as a percent,
excuse me, in absolute numbers in US dollars, here over on the side.
And then you've got the surplus countries with
their surpluses in absolute numbers US dollars on the other side.
Obviously, one has to compensate for the other.
So if these countries,
including Japan, China, Germany,
are going to have big surpluses,
somebody has to have a big deficit.
So the United States steps into there,
providing 400 billion or more in excess demand to the global economy,
and it's something that the global economy relies on for its growth.
Gayle AllardProfessor
