REV: AUGUST 28, 2013
RAFAEL DI TELLA
The U.S. Current Account Deficit
In 2013, worldwide fears were raised by ongoing political battles over U.S. government budgets and the Federal Reserve Bank’s intimations that it might raise interest rates, even as sovereign-debt crises in Europe remained unresolved and Chinese and some other developing-country economies seemed precarious. Having avoided a total economic collapse during the financial crisis of 2008-2009, investors and policymakers were confronted with slow recovery and the lingering effects of the crisis.
As analysts revised the growth prospects for the world economy, the role of the U.S. current account deficit had receded into the background. In fact, the current-account deficit had declined from an average of almost 5% of GDP from 2000 through 2007 to about 3% of GDP in 2011 and 2012.1 Much of the reason for that moderation was presumably not long-term: the slow U.S. growth had reduced imports. The financial counterpart of the U.S. current account deficits was the continuing capital inflow from abroad, as foreigners financed Americans’ spending in excess of their income. As these inflows accumulated, the gap between U.S. holdings of foreign assets and foreign holdings of U.S. assets (known as the net international investment position, or NIIP) was sinking to an unprecedented nadir. Still balanced in 1985, the NIIP had reached an almost $4.0 trillion deficit in 2012.2
Most U.S. policymakers had long downplayed the risks implied by the large current account deficit and net international investment position. They insisted that the deficit and NIIP simply reflected the attractiveness of the U.S. economy as a destination for global investment. For example, the 2006 Economic Report of the President focused on the current account’s counterpart, namely foreign investment in the United States. A 24-page chapter of the report entitled “The U.S. Capital Account Surplus” noted: “What factors encourage large and persistent U.S. foreign capital inflows? Several factors, which reflect U.S. economic strengths, encourage these inflows. In particular, a high rate of U.S. growth encourages foreign capital to be ‘pushed’ toward the United States.”3 However, when the United States someday resumed healthy growth, its current-account deficit could well rise back to 5% of GDP. Since the mid-1970s, among the world’s industrial countries, only smaller economies, such as Australia, New Zealand, Spain and Ireland had experienced current account deficits exceeding 5% of GDP.4 For the latter, the markets had become deeply concerned about their prospects.
Many analysts agreed that the current account could continue to be funded at higher levels, focusing in particular on the “insatiable appetite” of Asian central banks—most notably China—to invest in U.S. assets as a means of keeping the dollar strong and supporting U.S. spending on Asian ________________________________________________________________________________________________________________ Professors Laura Alfaro and Rafael Di Tella and Research Associates Ingrid Vogel, Renee Kim and Matthew Johnson prepared this case. It was revised by Research Associate Jonathan Schlefer under the supervision of Professor Richard Vietor. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or...
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