The American Way of Debt

After almost 15 years of unprecedented growth - interrupted only by a brief slowdown in 2000-2001 - the United States has accumulated a huge stock of foreign liabilities, equivalent to 25% of its GDP. With the current account deficit now exceeding 5% of GDP, US foreign debt is rising fast. But no country can accumulate debt forever - and what cannot last sooner or later must end.

In early 1985, when the US current account deficit reached $120 billion, about a third of today's level at current prices, the rest of the world stopped financing it. The outcome was a sudden fall in the value of the dollar, which depreciated by 50% against the Deutschemark. Europe should not welcome a sequel.

Indeed, the world itself cannot afford the disappearance of the US current account deficit - at least not quickly. Take away US imports and the timid growth Europe has seen in the past year would immediately disappear.

https://prosyn.org/CACSAjN