Deficiency jumpstarts the United States of America Economy
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David H. Levey and Stuart S. Brown who explain how an indispensable nation like the U.S can be a debtor nation brought about the Overstretch myth. The U.S current account deficit is the difference between what U.S residents spend abroad and what they earn abroad and in a year it stands at almost six percent of GDP. This is quite a low figure for a country with such a huge economy. Despite this, the U.S rest on an economy that is continuously extending its lead in the innovation and application of new technology ensuring its continued appeal for foreign central banks and private investors. The foreign banks will continue financing the U.S and even if they drop back, private investors will move in and finance the U.S.
If at all the foreign and private investors fail to finance the U.S., a dollar crush would hurt Europe and Japan more than the United States. However, all these options might fail and the resulting adjustment process would cripple the U.S. According to statistics, the United States claim the largest net liabilities in the world history (Federal debts and interest costs pg 19). The statistics at the foreign debt is the net international investment position (NIIP). Until 1989, the U.S. was a creditor to the world but the chronic current account deficits ever since have given it the largest net liabilities in the world. Foreign claims on the United States ($10.5 trillion) exceed U.S claim abroad ($7.9 trillion). According to various debtors, it is believed that the U.S economy relies on the unsustainable foreign assets that it has. This in turn has led to investors backing down on investing on their current assets, which has led to an increase in the interest rates. Despite this, the U.S. hegemony is in reality grounded thus the economy must be adjusted through increased interest rates. Therefore, the dollar will decrease its value as compared to other currencies. These trends will slow the growth of the U.S. consumer’s standard of living.
According to the national income identity, the main cause of the U.S. current account deficits since 1975 has been an increase in dept-output ratio, which has been mainly because of the effect of war. The civil war, World War 1 and World War 2 all produced noticeable upswings in federal indebtedness. The government of the U.S had an increase in dept more than the economy. After 1975, larger deficits and a less favorable relationship between the interest rate and growth rate have caused the debt-output ratio to rise. The U.S. current account deficit also tends to be due to the capital markets. The spending in the 1990s was balanced between the investment and consumption as compared to the 1980s. This has been a trend and is leading to a reduction in the trade balance since there is a decline in personal saving, due greater spending. This has led the U.S. not to continue implementing changes in the interest rates.
Deficiency jumpstarts the economy
When a country is experiencing deficiency, there is an option of developing the countries infrastructural projects by outsourcing workers and buying materials. The workers will then boost the economy of the country through spending. Cutting down on costs by the government is another method. It should reduce on spending and reduce on the health insurance services that will bring the economy at equilibrium. Funding fiscal deficit through issuing bonds is another method. Investors purchase the bonds and loan government with money to spend. Most of these loans gain interest and when the government pays them back, the principals of the investors are usually acquired.
The restoration of the U.S. balance of payments equilibrium can be restored through putting indirectly discriminatory rules to imports. These rules although not realizable impose a higher burden on the importer as the importer has to put additional work to make the product importable. Although these rules apply to both the domestic producer and importer, the domestic producer has a better advantage as it is possible to sell to the different states in the country as compared to the importer who has to go through some rules before selling the product.
Raising taxes would not have the same impact as cutting government spending on restoring current account balance because when the government raises taxes, it means everybody contribute in raising the economy whereby citizens pay more for their services. However, the government spends so much money when doing its major role and duties such as signing contracts with other countries and creating international relations with other countries which at some point the benefits from these outweighs the spending. It would be better if the government could raises taxes to restore the current account balance rather than cutting on its expenses.