Pernille von Ubisch
Dr. Nagy
ECON 337
11/04/15
Assignment 3

The United States’s current account deficit is a result of United States expenditure exceeding income. With an increasing government budget deficit, an increasing trade deficit, in addition to little national saving, the United States is dependent on large inflows of money from other countries. In other words, by running a current account deficit, the United States need to run a surplus on the financial and capital account in order for their balance of payments to balance out. This current capital inflow is allowing the United States to invest more than they save, and consume more than they produce, yet, this deficit makes the United States a debtor nation.
Economist argue that there are some concerns associated with having a current account deficit and being a debtor nation. As of now, foreign investors have big confidence in the U.S. economy, as the U.S. dollar is seen …show more content…
If the U.S. dollar is to experience a depreciation, the United States international debt in foreign currencies will increase. This is due to an increased amount of U.S. dollars needed in order to buy foreign currencies. Additionally, the interest payments that the U.S. is liable to pay on its debt will also increase, leaving America with very expensive debt to hold, together with an inability to compensate its obligations. Even without the dollar depreciation taken into account, the U.S. will have to attract more and more investors to boost the capital inflow to be able to pay the interest payments on their current debt. With a continuing current account deficit, this can turn into a vicious cycle of the U.S. growing its debt bigger and bigger, until it won't be able to commit to its obligations, which in return will lead to a decrease in foreign confidence in the U.S. economy, and worse case scenario, a default on foreign