Wednesday 22 September 2004

The unsustainable US current account deficit

An interesting post by Brad DeLong on the "unsustainable" US current account deficit and why it persists despite widespread fears of disastrous consequences.

In my opinion, the US current account deficit is the consequence of an overvalued US dollar combined with loose monetary and fiscal policies. The latter encouraged consumption and the former encouraged that consumption to be satisfied from overseas.

To reverse the deficit would mean that either the US dollar has to fall -- which might cause a recession in export-dependent countries in Asia -- or economic policy has to be tightened to curtail consumption -- which might cause a recession everywhere.

The choices aren't that enticing.

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