The US Accounts Deficit in “The Overstretch Myth”

Main points of the article

In the article, Brown and Levey delve into the current furor surrounding the U.S. accounts deficit and the level of debt the U.S. finds itself in. Brown and Levey state that the problems are less dire than what analysts claim them to be. They focus on aspects related to the growth potential of the U.S. economy, the fact that the U.S. continues to experience far lower interest rate thresholds on its debt and has far more investor confidence as compared to other countries. Combined with the growth potential of the U.S., the authors claim that analysts are worried over circumstances that are applicable only to other countries that do not have the current capabilities and capacity for growth and development that the U.S. has. They even imply that in time NIIP rates could stabilize, resulting in a better economic situation for the U.S. as a whole. It should be noted though that this article was written prior to the start of the 2008 financial crisis and, as such, the perspectives within could have changed significantly by this point in time given the ramifications the 2008 financial crisis and the resulting global recession had not only on the U.S. economy but the global economy as well.

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Origin of U.S. Account Deficit

Basically, the reason behind current U.S. account deficits can be traced to legislative practices that were put in place since 1975, wherein the approval process behind government spending for projects, operations, etc., takes place prior to the establishment of spending limits. This means that the U.S. Congress approves of projects and other essential spending and then approves of a government budget. Should the requirements of the approved spending exceed the amount that the U.S. brings in, the government merely raises the debt ceiling in order to borrow money so that it can continue operations. In essence, since 1975, the U.S. has approved spending budgets for an assortment of projects and operations that exceed the amount of taxed income, which requires the government to borrow money in order to pay for the projects. A more feasible system would be for the government to set a particular budget and then create spending limits based on taxed income; however, such a process is simply not present.

Evaluation of Balance of Payments Equilibrium

While not outright stated by the article, one of the current advantages of the U.S. over other states (aside from its size) is the faith investors have in the U.S. government and its ability to repay its debts. This gives it more leeway in terms of interest rates and methods of payment as compared to other countries, which contributes significantly towards its ability to finance itself. Whereas other countries with massive budget deficits, trade deficits, and debt would have a hard time finding willing international lenders, this was seen in the case of Spain, Ireland, and Greece during the European debt crisis) the fact remains that the faith lenders have in the U.S. enables it to continue with its current method of financing despite the fact that its debt ceiling has grown $11 trillion. Combined with the fact that the foreign debt of the U.S. government is denominated in its own currency, this means that the U.S. could “theoretically” print its way out of debt; however, this, in turn, would significantly devalue the American dollar and would cause severe inflationary measures to take place. It is based on this that in order to bring about a restoration of the U.S. balance of payments towards an equilibrium, one of two things must happen, either:

  1. The U.S. would experience an economic resurgence both in its domestic and foreign markets resulting in higher capital inflows and low capital outflows with better NIIP ratios.
  2. The U.S. economy can continue to outpace its rival countries in terms of growth and development to the extent that it can “grow out of” its current budget and trade deficits.

The latter solution is the more likely to occur as Brown and Levey explain that the economy of the U.S. “remains on the frontier of global technological innovation, attracting foreign capital as well as immigrant labor with its rapid growth and the high returns it generates for investors.” This means that in terms of growth potential, economic capability, and localized demand, the U.S. continues to have the potential to be able to meet its balance of payments equilibrium in the far future so long as its economy continues to grow. However, should anything occur that would cause a contraction of the economy, as seen during the 2008 financial crisis, this would cause considerable problems due to the need for economic recovery and an overall “lessening” in the faith of the international community in the ability of the U.S. to pay its debts? In terms of creating an economic resurgence, one way of doing so would be to devalue the dollar, which would temporarily increase interest rates for the U.S., create expensive exchange rates and increase the price of goods; however, this would also have the effect of making American goods and services cheaper thus increasing the rate of trade.

Raising Taxes

Raising taxes would have a distinctly different impact as compared to cutting government spending since it would increase the cost of doing business in the private sector, which would result in significant repercussions in terms of increased rates of unemployment, lower rates of business expansion as well as a general slowdown of the U.S. economy as a whole. The reason behind this is simple, consumer spending is the primary means by which an economy functions; the higher the rate of taxation, the less likely consumers are to spend, which would slowdown the economy and cause far lower rates of revenue for the government.

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StudyCorgi. (2021, May 6). The US Accounts Deficit in "The Overstretch Myth". Retrieved from https://studycorgi.com/the-us-accounts-deficit-in-the-overstretch-myth/

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StudyCorgi. "The US Accounts Deficit in "The Overstretch Myth"." May 6, 2021. https://studycorgi.com/the-us-accounts-deficit-in-the-overstretch-myth/.

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StudyCorgi. 2021. "The US Accounts Deficit in "The Overstretch Myth"." May 6, 2021. https://studycorgi.com/the-us-accounts-deficit-in-the-overstretch-myth/.

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StudyCorgi. (2021) 'The US Accounts Deficit in "The Overstretch Myth"'. 6 May.

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