The indebted empire: America's current-account deficit problem

Abstract

America is like no other dominant power in modern history because it depends on other countries for capital to sustain its military and economic dominance. The US current-account deficit, comprised primarily of the trade deficit and interest payments on America's external debt to foreign investors, has ballooned since 1997 to reach an annual rate in excess of 6 percent in mid-2005. The US is tied into a co-dependency with Asian countries, which fund its borrowing in order that their export-driven economies have the benefit of competitive exchange rates to sell their goods to Americans. Although some analysts have characterized this relationship as Bretton Woods 2, it is inherently unstable. The US requires Asian countries to continue purchasing massive quantities of dollar reserves but their capacity and need to do so are finite. When Asia stops buying dollars, the American economy will experience problems that will have implications for America's global power. To avert this risk, the US needs to reduce its own governmental budget deficit and promote international agreement for currency and other economic adjustments that can help to rebalance trade flows.