With the Senate threatening to pass import tariff legislation if China does not allow the yuan to appreciate,Ã‚Â the topic of the U.S.’s expanding current account deficit is hotter than ever.Ã‚Â A recent article from American Enterprise Institute scholarÃ‚Â John Makin, though,Ã‚Â gives good analysis on why the current account deficit may not have the negative implications many politicians claim. Despite all the doomsday predictions about the deficit leading to a devaluation of the dollar and subsequent capital flight, the dollar has remained quite stable against major currencies over the past 16 years.Ã‚Â When adjusted for relative inflation,Ã‚Â it has even appreciated slightly against surplus countries such as Japan.
The reason the dollar has defied predictions of a 25-30% fall in value is because America is increasingly becoming a secure means of wealth storage. If other countries had little faith in U.S. assets, they wouldn’t be willing to buy dollars in order to acquire those assets, and this would mean an excess of dollars abroad and a subesequently lower value of the dollar.
On the contrary, foreign savers are more willing than ever to buy dollar-denominated assets, as they are the most secure means of wealth storage in the world. The millions of Chinese who are saving as much as 40 percent of their incomes would much rather buy U.S. Treasurys and mortgage-backed securities than save their money in shaky state banks. With the Bank of Japan just now raisingÃ‚Â interest rates, Japanese savers will certainly continue to favor higher-yield U.S. debt, as will other nations in Southeast Asia and in Europe.
This translates into a hugeÃ‚Â comparative advantage in wealth storage for the U.S.,Ã‚Â which will keep the dollar steady even as the current account deficit increases. Rather than viewing the situation as an accountÃ‚Â imbalance, politicians should begin to view it as simply a different kind of balance, one in whichÃ‚Â the U.S. is acting as a global financial intermediary. World actors have a huge stake in the smooth functioning of global financial markets, and becauseÃ‚Â U.S. assets play a vital role in these markets, don’t expect the current account deficit to decrease anytime soon.