What Is a Current Account Deficit?

The essence of the current account deficit (Rebalancing) is to buy more and sell less or borrow money to consume and invest. This also refers specifically to the US current account deficit.

Current account deficit

How to explain the US current account deficit is not only the central issue debated by global economists, but also the focus of world political and economic policymakers. There are five related doctrines:

The first doctrine: the US current account deficit is manipulated by other countries

From the globe

Roots of global financial turmoil

First, the expanding US current account deficit corresponds to the continuous increase in global dollar assets or foreign exchange reserve assets. According to the global currency quantity theory, it must mean a global excess of liquidity and inflation, leading to skyrocketing global asset prices (especially the skyrocketing prices of oil, gold and other minerals and precious metals). From 1870 to 1913, the golden age of the gold standard, the global average inflation rate was only 0.2%. From 1939 to 1989, after the collapse of the gold standard fixed exchange rate system, the global average inflation rate was as high as 4.5%, of which the global average inflation rate was from 1973 to 1982. More than 10%.

After 1989, the world seems to have entered a golden age of low inflation and low interest rates. However, the average inflation rate is still much higher than the era of fixed exchange rates (about 2% on average). In recent years, as the growth rate of the global real economy (real productivity) has begun to slow, the possibility of the world entering a era of high inflation and high interest rates has increased rapidly. To gain a deep understanding of global excess liquidity, speculative global inflation, interest rates, asset prices, and real economic growth trends, we must thoroughly explain the causes of the US current account deficit.

Second, the growing US current account deficit and its corresponding global dollar assets are the main source of turbulence in the global financial and monetary system. In the late 1960s, global reserve assets were only tens of billions of dollars, and today they have exceeded $ 5 trillion. The astronomical global dollar assets have spawned "massive" foreign exchange speculative trading, countless financial derivatives and dazzling financial innovations, leading to sharp turbulence in global asset prices, which imply huge financial risks that cannot be regulated. May have a huge impact on the financial systems of countries. Long-term in-depth research by Federal Reserve Chairman Ben Bernanke proves that after the 1970s, the frequency of global asset price turbulence and financial and monetary crisis surpassed all previous generations. The recent subprime debt crisis is nothing more than a dramatic re-enactment of the financial crisis, and it will continue.

Central Bank's "Regulatory Paradox" and Currency Diplomacy "Wrestle"

Third, the borderless financial markets created by huge US dollar assets have plunged central banks into a regulatory paradox: on the one hand, the central banks can scarcely monitor the global activities of financial institutions, and they cannot even understand the strangeness Weird financial innovation. Even Greenspan acknowledged: "Global financial markets have become so large, complex and turbulent that the oversight concepts developed in the 20th century have long been of no use. In today's world, I really don't see any more government regulation having any effect. ! "

On the other hand, once domestic financial institutions are in trouble, central banks of other countries have to act as "financial lenders" to lend a helping hand. Financial institutions have no fear of participating in global transactions and suffered huge losses. The central bank was forced to pay the bill, but the consequences were shared by the general public. This is the forced mechanism of today s global monetary system: the risky innovation of global financial institutions. The activities led to the financial crisis, which in turn forced the central bank to issue more currencies, which further exacerbated the global excess liquidity and the surge in asset prices, giving birth to the next more severe financial and currency crisis. After the outbreak of the subprime debt crisis, Wall Street gangsters wearing Armani suits crying and crying for the Federal Reserve to cut interest rates and inject capital, which is the most ironic and true portrayal of the global financial and monetary system today!

Fourth, the growing US current account deficit is becoming the main battleground for international financial and monetary diplomacy. The main reason for the US government to force the appreciation of the renminbi is to correct the US current account deficit. The logic of such extreme errors, despite repeated criticism by economic masters, is still lingering. Countries that accumulate large amounts of US dollar assets (not just China) are certainly not willing to continue depreciating the US dollar, but the United States has spared no effort to criticize countries with trade surpluses for "manipulating exchange rates."

Historically, the United States has severely accused Europe and Japan of manipulating exchange rates. Since 2002, the target has been China. Not only that, the US government has also invented some inexplicable terms, such as "global imbalance" and "global adjustment responsibility", etc., claiming that the appreciation of the yuan is China's responsibility to achieve global balance. The weak US dollar policy has caused the world's major currencies to appreciate against the US dollar, and countries with large appreciation rates have in turn blamed countries with small appreciation rates (for example, Europe has recently severely criticized China). The chaos in the global exchange rate is likely to evolve into "neighborhood" trade sanctions and protectionism. ^[1]