Untangling the US Deficit

Untangling the US Deficit

Evaluating Causes, Cures and Global Imbalances

Richard A. IIey and Mervyn K. Lewis

As the US current account deficit has expanded to a record level of $811 billion in 2006, debate about the deficit’s causes and consequences has also grown. Is the deficit a product of American profligacy or a ‘glut of savings’ in the rest of the world? Is it a serious problem or essentially benign? Untangling the US Deficit charts a course between the competing explanations in a systematic and rigorous approach, incorporating the latest academic research and market data. Particular attention is given to the China–United States trade imbalance and to the special role of the US dollar and US capital markets in global finance.

Chapter 8: China and the United States

Richard A. IIey and Mervyn K. Lewis

Subjects: economics and finance, financial economics and regulation, money and banking


CHINA: FRIEND OR FOE? An article ‘Made in China’ in Fortune (Taylor, 2006, p. 65) posed two alternatives. Will China be a beneficial driver of global economic prosperity? Or should Americans be scared of it, as a threat to jobs and living standards?1 US Treasury Secretary Hank Paulson in September 2006 would seem to have opted for the first, telling his hosts in Beijing that ‘We want you to succeed.’ He continued: ‘The United States has a huge stake in a prosperous, stable China – a China able and willing to play its part as a global economic leader’ (The Australian, 15 September 2006, p. 24). However, the second question never seems never to be far from the surface, as reflected in a Fortune 2005 cover story called ‘China rising – will the US be flattened?’ (4 July 2005). In the 2006 article referred to above, the author notes: ‘In an echo of the demonization of Japan in the late 1980s, China is accused of gaming the world economic system to steal American jobs’ (p. 65). Such fears are fanned by predictions such as that by Jeffrey Sachs to the effect that by 2050, China’s economy could be 75 per cent larger than that of the United States.2 Clyde Prestowitz, president of the Economic Strategy Institute in Washington in his book Three Billion New Capitalists: The Great Shift of Wealth and Power to the East (2006) chronicling the rise of China and India, provides much detail...

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