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 9: Conclusion

Richard A. IIey and Mervyn K. Lewis

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


A REVIEW OF OUR APPROACH There is no single cause of the US current account deficit and no single solution. More so than for any other country, the US external deficit is the result of the economic (and even political) decisions of a vast multitude of transactors, both government and private, engaged in buying and selling goods, earning and spending, saving and investing, and building and rearranging their wealth. It will change, if at all, when those decisions are revised in response to different economic signals, rising wealth and indebtedness, and ever more concentrated and unbalanced portfolios. Alternatively, governments individually or in unison may agree to take corrective actions. From the outset we made clear that this book was not designed to be a polemic, directed to expounding one particular viewpoint. We had no particular barrow to push, nor did we start with a strong set of priors (although we did have some preconceptions not all of which turned out on closer examination to be vindicated). Rather, our aim has been to canvass, and evaluate, a wide range of hypotheses as to, first, the origins and sources of the deficit, second, its sustainability, and third, the urgency of corrective action and the consequences of doing nothing. We have come to some conclusions in the process of this investigation, but begin with a brief review of what has been done in earlier chapters. In the first chapter we provided some bullet points detailing the extent of the...

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