The Economic Growth in the US - Term Paper Example

During the last two decades, the US trade deficit has grown very dramatically, giving concern that it may be detrimental to the national and global economies. The US trade deficit is determined merely by the balances between saving and investment in the country and in other outside countries. Their effects have a significant impact on global capital flows. R. Reagan's trade deficits (Galbraith 1992) pathed the way for further economic troubles shaking America today. G. Bush Jr.'s brutal medieval economic policies (Roberts 2006) deepened the economic abyss, into which the country is slowly falling. How is the significance of a country's economy assessed to draw such conclusions To evaluate a country's economy, economists usually use the measure known as the current account. The current account is "the combined balances on trade in goods and services, income, and net unilateral current transfers" (Weinberg 2006). The worsening current account deficit must cause permanent depreciation of a national currency. To economists' surprise, in case of the US, the growing current account deficit produces periods of appreciation of the US currency. Such were the periods from 1995 to 2002 and 2005 (Roubini 2005). Roubini claims that the current account deficits may be related to the appreciation or depreciation of a currency (2005). A national currency weakens when the inflow of capital in the country cannot fully finance a current account deficit, that is, the supply of financing from the capital account is low (Roubini 2005). As it is seen, capital inflows and outflows play an important role in this relation. Short-term and long-term interest rates, political risk factors, the GDP growth rate and other economic factors determine the capital flows and are the direct causes to the currency fluctuations. Roubini calls all these "the law of gravity" for a currency (2005). Still, as it was mentioned above, sometimes the laws of gravity are defied (Roubini 2005). The current account deficit worsens so much that the trajectory of its falling recoils reversely on the national currency. In 2005, the US dollar appreciated despite all dooming predictions. Which were the factors responsible for such a turn According to Roubini's opinion, there are three major factors that made it possible for the US dollar to maintain its status quo: 1/ The US short-term interest rates were kept tightened as compared to Europe and Japan, where they were on hold; 2/ The economic growth rate in the US was higher than in the European Union and Japan; 3/ The US Government adopted the Homeland Investment Act as of October, 2004, which was meant to allow companies to repatriate offshore cash balances at a reduced tax rate (Roubini 2005). In 2006 the US current account deficit sloped down even more dramatically than during the previous year. According to the latest data, it increased to $218.4 billion in the second quarter of 2006 (Weinberg 2006). Economists do not cease to debate about the real and hypothetical explanations as to the causes worsening the overall picture of the US economy, in general, and the current account deficit, in particular. To generalize different standpoints, all debating boils down to two groups of explanations: domestic and exterior causes. Domestic developments focus mainly on diminished saving rates due to profligate consumption. (Ferguson 2005). Economists have made considerable research trying to explain the decline in personal saving over the past two decades in the USA. Unfortunately, there is no theory, which can fully account for it. Still, several factors may serve as important premises for it: 1/ Large capital gains on investments in land and stocks make people richer, thus, giving incentive to excessive consumption. As a result, U.S. consumers purchase more goods, including imports; 2/ A larger number of credit opportunities (credit cards, home loans (Arnold 2000). 3/ The increasing budget deficit. G. Bush Jr.' s replays R. Reagan economic policies: large tax cuts, a big increase in military spending, and continuation or even expansion of popular spending programs (Sachs 2002). The massive budget deficit seems to stay with America from the beginning of the XXIst century as tax cuts and military actions in Iraq and Afghanistan continue to increase. Besides these alarming factors, the US current account deficit also reflects a technological shift leading to the growing prosperity of the US economy (Ferguson 2005). From the international perspective, the US suffers from the global decline in investment, which weakens foreign spending and, logically, investments in the US economy (Ferguson 2005). Even after the economic crises of the nineties of the XXth century and with high saving rates and current account surpluses, the developing countries do not hurry to invest in the US for the fear that their economies might lose their competitiveness. This trend has been continuing for a number of years now. The economic growth in the US is slowing down and it hardly reaches 2% per year, whereas the economic growth of its main "rivals" (the EU and Japan) is expected to be over 2% in second half of 2006, not speaking about Asian "booming" economies. Although temporary, fluctuations of oil prices are also a factor reflecting on the US worsening current account deficit in 2006. High prices for oil, the main product imported by the US economy, increase the exterior debt of the country dramatically with each rise. With all these in mind, we could ask ourselves whether the USA can continue to run such large current account deficits. Could it continue to borrow from abroad to finance its deficits Will foreign investors continue to finance the American debt Is the American economy extremely unhealthy and it faces an economic crisis First, the American economy accounts for one-quarter of the world economy and over half of its financial assets. Today, the USA still produce higher returns on real investments than Europe or Japan. Investments placed in the US are more secure and reliable than in other emerging economies. Let us just remember the economic crisis of the nineties in Latin America and Russia, when huge capital inflows came to America in order to be safe. For now it is impossible to state the US will be facing a sudden reverse in capital flows that would be destructive to its economy. The US is still able to exert influence over global interest rates and, which is more, much of the capital inflows are in the form of long-term investments (Ferguson 2005). Second, large savings in the booming Asian economies could be easily transferred in the form of investments to the USA (Geithner 2006). Third, the global economic trends such as deregulations, deregulation, reduction of trade barriers, declining costs of goods increase the US productivity and make it a very attractive place to invest in. In spite of the world economy's trends, America takes measures to cope with its deficits. It wants to reduce its current account deficit by lowering interest rates and imposing some protectionist policies. At the same time, it allocates huge funds in the military actions in Asia. Unfortunately, there is no possibility to rapidly decrease its budget deficits with the actual expenditures for the military actions outside the country. These measures are more inward-looking and are unlikely to resolve the problem of deficits (Bernanke 2005). Probably, the solution for reducing the current account deficit is to better the world economy by encouraging developing countries to be active in the international capital markets and borrow more than lend. Other factors needing to be improved in poorer countries could also benefit America. These are: improvement of investment climates achieved by economic stability, reduction of corruption and removal of trade and financial barriers. 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