While most economies grow through investment or export that expands demand, the U.S. economy has kept up its growth by increased consumption. Using its privileged position to borrow money, the U.S. has reached a historically unprecedented level of current account deficit, which has been followed by a debt crisis in 2007-08. This paper argues that the financial crisis of 2007-08 is symptomatic of macroeconomic imbalances in the U.S., because the imbalances are eventually resolved in financial markets, and passed on to the real economy. On the other hand the international financial system is dependent on U.S. trade deficit for feeding liquidity into financial and commodity markets. The paper breaks new ground in the analysis of the current financial instability in the U.S. by showing how it links up with macroeconomic imbalances and financial inflation in the U.S. economy, and how, through the foreign trade deficit, those imbalances and inflation are transmitting instability to the rest of the world. This approach is relevant because there is a dominant structural imbalance in the U. S. economy, but little theory addressing the consequences of the U.S. trade deficit for the international financial system. The academic debate, divided between monetarists and sceptics, has instead been centered on the question of whether the U.S. trade deficit is sustainable or not, with emphasis on domestic factors. However, neither of these positions offer a sufficient explanation of the present situation since they do not account well enough for the global integration of capital markets. In this context, a more systematic view will be used to analyze the relationship between the U.S. imbalances and the global financial markets. This will lead to the conclusion that the financial crisis in 2007-08 is transmitted to the rest of the world through the U.S. trade deficit; that there is a global financial dependence on the U.S. in addition to its political dominance; and that the U.S. macroeconomic imbalances cannot be resolved without affecting the rest of the world whose financial systems are dependent on dollars supplied by the U.S. through its current account deficit. Section one presents the main views currently put forward on the macroeconomic imbalances. Section two examines how the dominant U.S. position in international finance is supported by the U.S. balance of payments deficit. Section three examines the links between the U.S. balance of payments and the current financial crisis. Section four discusses the effects of the US deficit on other countries. This is followed by a conclusion.
4 THEORIES The U.S. has a higher level of current account deficit in the balance of payments than any other state has had before, because the value of imports to the U.S. is much higher than the value of their exports. This has happened simultaneously to the U.S. running a record high fiscal deficit, which is paid for by issuing new debt. The financing of the U.S. national debt has been done primarily in Asia, and particularly in China, and has during the last five years included inflows of around two billion U.S. dollars every day. (Trichet 2005, 6). The U.S. has in other words, been the recipient of the world´s savings, while emerging economies and developing countries have been the supplier. This has happened in combination with internationally low interest rates. (Summers 2006, 2). The academic discussion about the U.S. trade imbalance has been dominated by two opposite positions, the monetarists and the sceptics, that primarily disagree on whether the U.S. current account deficit is sustainable or not. There has also been a debate on whether the U.S. is responsible for the global imbalances, or if emerging economies like China are to blame for saving too much without letting their currency appreciate,download
4 THEORIES The U.S. has a higher level of current account deficit in the balance of payments than any other state has had before, because the value of imports to the U.S. is much higher than the value of their exports. This has happened simultaneously to the U.S. running a record high fiscal deficit, which is paid for by issuing new debt. The financing of the U.S. national debt has been done primarily in Asia, and particularly in China, and has during the last five years included inflows of around two billion U.S. dollars every day. (Trichet 2005, 6). The U.S. has in other words, been the recipient of the world´s savings, while emerging economies and developing countries have been the supplier. This has happened in combination with internationally low interest rates. (Summers 2006, 2). The academic discussion about the U.S. trade imbalance has been dominated by two opposite positions, the monetarists and the sceptics, that primarily disagree on whether the U.S. current account deficit is sustainable or not. There has also been a debate on whether the U.S. is responsible for the global imbalances, or if emerging economies like China are to blame for saving too much without letting their currency appreciate,download
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