How Long Can the Unsustainable U.S. Current Account Deficit Be Sustained?

72 Pages Posted: 11 Jul 2008

See all articles by Carol C. Bertaut

Carol C. Bertaut

Board of Governors of the Federal Reserve System

Steven B. Kamin

Board of Governors of the Federal Reserve System

Charles P. Thomas

Thomas & Son Analytics

Date Written: July 2008

Abstract

This paper addresses three questions about the prospects for the U.S. current account deficit. Is it sustainable in the long term? If not, how long will it take for measures of external debt and debt service to reach levels that could prompt some pullback by global investors? And if and when such levels are breached, how readily would asset prices respond and the current account start to narrow?

To address these questions, we start with projections of a detailed partial-equilibrium model of the U.S. balance of payments. Based on plausible assumptions of the key drivers of the U.S. external balance, they indicate that the current account deficit will resume widening and the negative NIIP/GDP ratio will continue to expand. However, our projections suggest that even by the year 2020, the negative NIIP/GDP ratio will be no higher than it is in several industrial economies today, and U.S. net investment income payments will remain very low. The share of U.S. claims in foreigners' portfolios will likely rise, but not to an obviously worrisome extent. All told, it seems likely it would take many years for the U.S. debt to cumulate to a level that would test global investors' willingness to extend financing.

Finally, we explore the historical responsiveness of asset prices and the current account in industrial economies to measures of external imbalances and debt. We find little evidence that, as countries' net indebtedness rises, the developments needed to correct the current account - including changes in growth rates, asset prices, or exchange rates - materialize all that rapidly.

We would emphasize that these findings do not imply that U.S. current account adjustment is necessarily many years away, as any number of factors could trigger such adjustment. Our point is rather that international balance sheet considerations likely are not sufficient, by themselves, to require external adjustment any time soon.

Keywords: sustainability, external imbalance, dollar

JEL Classification: F21, F32, F37

Suggested Citation

Bertaut, Carol C. and Kamin, Steven B. and Thomas, Charles P., How Long Can the Unsustainable U.S. Current Account Deficit Be Sustained? (July 2008). FRB International Finance Discussion Paper No. 935. Available at SSRN: https://ssrn.com/abstract=1158065 or http://dx.doi.org/10.2139/ssrn.1158065

Carol C. Bertaut (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Steven B. Kamin

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-3339 (Phone)
202-736-5638 (Fax)

Charles P. Thomas

Thomas & Son Analytics ( email )

5409 Center St
Chevy Chase, MD 20815
United States
2022075834 (Phone)

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