NCPA - National Center for Policy Analysis

CURRENT ACCOUNT DEFICIT MAY DRIVE UP INFLATION, INTEREST RATES

January 10, 2005

The U.S. current account deficit, which measures the net exports and the net income earned on foreign assets, is becoming perilously large, says Bruce Stokes of the National Journal.

Increasingly over the last decade America has been buying more goods and services from foreign countries than it sells to them. Foreigners are also earning more income from owning assets in the United States:

  • In 1997, the first year of President Clinton's second term, the current account deficit was $136 billion.
  • In 2001, President Bush's first year in office, the current account deficit was $386 billion.
  • Today, the current account deficit is expected to reach $600 billion, or about 5.7 percent of gross domestic product (GDP).

According to Stokes, if left unattended, the deficit could lead to a dollar crash which would increase inflation and interest rates at home and slow income growth for all Americans.

He says the solution is to immediately embark on a gradual depreciation of the dollar by 20 percent. This would bring the current account deficit to about 2 or 3 of gross domestic product (GDP). Stokes also says reigning in the budget deficit will help achieve this goal.

Source: Bruce Stokes, "That Other Troubling Deficit," National Journal, October 2004.

 

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