US Current Account Deficit: Global Implications

This book is an attempt to capture the future impact and implications of the U.S. Current Account Deficit, which has become a global concern due to the fear that this would affect not only the U.S. but also her trading partners in future. The deficit has started to grow from the early eighties, and now it is of a record magnitude. The concern is that if the deficit continues in this manner, will it be harmful for the global economy as a whole? There are two opposite views in this regard. According to one group, there is no major problem at all, and the fear is actually overemphasized. However, the other group thinks that the situation is serious and there are at least two potential turmoils in the future; first, developing countries would lose their export-competitiveness to a much greater extent as a result of appreciation of the value of their currencies vis-à-vis the dollar. Finally, the dollar might lose its status as the International Reserve Currency. A vigorous debate is lingering among researchers whether Euro would dominate dollar as the international reserve currency, as dollar is continually declining as a result of sustained and increasing US current account deficit. Whether investors’ confidence remains in dollar as the international reserve currency is a matter of concern. An assurance may be that U.S. does not need to defend her currency, since, unlike developing countries, she can borrow her own currency. However, if she acts in this manner, the net debt to foreigners would ultimately reach a level, when international investors would deny financing the deficit further.