blog Four

In the 21^st century, The U.S has gone from the world’s number one creditor to being the number one debtor. During the Bush administration, the US deficit has been the highest its economic history, however the U.S government does not seem to worry about balancing the deficit anytime soon. Since the Nixon administration decided to abandon the Gold standard, the world has been following the economic path US has lay for the rest of the world. why isn’t U.S worried about the high deficit? There is a key difference between debt and equity investments. U.S. debt held by foreigners requires us to make scheduled payments of interest and principal, but foreign equity investments do not. Unlike the debt of most developing countries, U.S. debt is denom­inated in this country’s own currency, which US issues themselves. The U.S. financial position, perhaps the most worrisome of all, US economy does not hold the threat of triggering the kind of financial crisis we have seen recently in East Asia or Latin America.

In my personal opinion, the America can easily decrease its deficit through change of policy on import by establish tariff, this could and manipulate the value of US dollar. However the U.S economy is very unique in comparison to other economies in the world. For example, if the U.S. government increases tariffs, Americans will buy fewer imports, so reducing the current account deficit. But economic theory indicates that this reduction will occur only if one of the other factors changes to bring about a decrease in the capital account surplus. If none of these other factors changes, the reduced imports from the tariff increase will cause a decline in the demand for foreign currency for example Yen, which in turn will raise the value of the U.S. dollar. The increase in the value of the dollar will make U.S. exports more expensive and imports cheaper, offsetting the effect of the tariff increase. The result is that the tariff increase brings no change in the current account balance.

U.S government has it’s the upper hand in world economy, since all currencies are measure to the U.S dollar. U.S deficit also represents more currency flow in the world economy, this deficit has created financial opportunity for its trade partnering countries, however the current U.S economic recession is the perfect result of whether this debt phenomena is good or bad for Americans.