Question

The US is a net debtor because they import more than they export? Foreigners own more US assets than the US owns foreign assets. Correct? Is a net debtor always running a current account deficit?

Answer 1

The richest country on earth seems to borrow more because of their trade deficit. Americans generally spend more on their imports than their business exports.

Following are some of the reasons of their deficits:

• The crashes that happened in 2000 & 2008 sent more investors fleeing from the stock.
• The government reduced the prime lending rates in order to recover from the subsequent recessions which created excess cash for a safe investment.
• In the 1980’s the south East Asian markets & the Japan’s housing market crashed which bought down the country’s economy.
• Argentina & other Latin American countries defaulted on their loans in the 1990’s.
• Japanese companies expanded, sending exports into the U.S. market. They exchanged the dollars they received for local currency. The BOJ used these dollars to buy Treasury notes, becoming one of its largest holders. That also increased the strength of the dollar and depressed the value of the Japanese yen.
• Apart from Japan, china also did the same thing which made china the largest foreign holder of the US debt.

Between 1997 & 2005 the deficit increased from 1.7 to 6.1% of the GDP. In other words,America borrowed 6.1% of the output in order to pay for its imports.

Americans also held foreign assets which wasn’t enough. But even after selling the foreign assets it still owed 20% of the production.

The sheer size of the deficit raised concerns about whether the U.S. economy could pay a decent return to investors. No one knows what this tipping point could be, because no country with an economy this large has ever run a deficit this large. If foreign investors panicked and started selling U.S. assets at any price, it could cause the dollar's value to collapse. That would create a global economic crisis.

During the recession, the current account deficit disappeared as trade and financing dried up. But the factors that caused the deficit remained. These include high consumer debt, the U.S. federal budget deficit and debt, and high savings rates in Japan and China. If not addressed, these factors will limit U.S. economic growth.