A current account deficit measures if a country is a net lender or borrower to the rest of the world. In the case of an account deficit, it means that a country is a net borrower. Basically, a current account is composed of the net balance of trade, net transfers from abroad, and net investment income. Overly, the presence of deficit or surplus current account is either positive or negative depending on how the finances were used and the proportion of these figures. For example, when a country is experiencing rapid development, it always runs into an account deficit. Naturally, this is because the country has a lot of investment opportunities and little domestic savings to take advantage of these opportunities. Consequently, foreign investors can provide the capital needed to finance these investments.
On the contrary, a long and persistent current account deficit is an indication of a strong domestic consumption that is not taking responsibility to repay debtors. From this perspective, a critical look at the US government policies can form a good basis for the assessment of the impact of the country’s current account deficit. Overly, however, the US economy has been productive in the recent years which has enabled it to properly handle the existing current account deficit.
Moreover, even with the emergence of large economies such as India and China, investors will be slow to pull out their finances from the US. Notably, China is a large contributor to US current account deficit, and by it demanding for quick repayment of its finances, this will lead to a rise in the value of the Chinese Yuan. Primarily, this is against the country’s economic objectives of ensuring that the Yuan is cheap so that the country’s exports are competitively priced.
In addition to this, the American consumers have a high appetite for imports and the foreign economies would like to sustain this market. Prudently, a quick transfer of finances to India and China will make the US government raise its interest rates in order to increase the country’s savings and effectively mobilize local finances for investments. In general, this will lead to a reduction in imports in the short run, and a probable reduction in domestic demand. Notably, this may trigger massive loan defaults to the foreign financiers. On the same accord, it may lead to a reduction in their export market.
To sum up, the current US account deficit is sustainable. However, the US should steadily find ways of financing its investments using local finances such as savings so that it can reduce its account deficit. Primarily, this is because in the long run, the emergence of China and India as large economies deficit can have detrimental effects on the US current account since there will be adequate time to transfer finances to these economies.