In a new post, Ceccheti and Schoenholtz ask “How big can the U.S. current account stay?”:
In the past few years, the U.S. current account deficit has shrunk from over 6% of GDP in mid-2006 to less than 3% today. Since these current account deficits reflect capital account surpluses, many people view them as a symptom of the problems that led to the crisis. That is, funds from abroad were fueling the credit boom in the United States, which in turn fed the boom in housing prices, etc.
As you can see in the chart below, over the past three decades the U.S current account has been in surplus only briefly in the first half of 1990. Since then, it has been continuously in deficit. How is it that the United States can keep borrowing without a collapse in the currency or a surge in borrowing costs? Is there some sort of limit?
One possible answer is that because the world runs on U.S. dollars, everyone needs U.S. dollar-denominated securities. Countries use these both to transact and to insure themselves against foreigners’ suddenly deciding to withdraw assets – a capital flow reversal. These needs result in the “exorbitant privilege” that accrues to the United States as the issuer of the reserve currency.
And calculate that:
Overall, these simple computations lead us to conclude that the U.S. current account deficit can remain at 2% of GDP or more for some time to come without threatening the value of the dollar or triggering an externally driven surge in U.S. borrowing costs.
Which made me wonder about what sort of “super exorbitant privilege” accrues to Australia which has run larger and more persistent current account deficits (a pattern that goes back all the way to the 19th century)? Its currency is also denominated “dollars”, although A$, not US$!