16 September 2005

US current account deficit shows improvement

America's deficit in the broadest measure of international trade showed a slight improvement in the April-June quarter although it was still at the second-highest level in history. The Commerce Department reported that the deficit in the US current account totaled US$195.7 billion in the second quarter. That was down 1.5% from the deficit in the first three months of this year -- $198.7B -- which was the all-time high. Even with the slight improvement, the US is on track to surpass last year's record current account deficit of $668.1B. While the US so far has not had any trouble attracting the foreign money needed to finance this deficit, economists worry that at some point foreign investors will no longer want to hold such sizable sums of dollar-denominated assets. The slight improvement meant that the second quarter deficit represented 6.3% of the country's total economy, down from the record level of 6.5% in the first quarter. Federal Reserve Chairman Alan Greenspan has called the current account deficit unsustainable at present levels but he has also said he believes market forces should be able to deal with the problem in a way that does not seriously disrupt the economy. A less benign outcome would have foreigners suddenly deciding to dump their US stocks and bonds, sending stock prices plunging and interest rates soaring. Such a stampede for the exits by foreigners could be enough of a jolt to push the country into a recession. However, in the view of Greenspan and many private economists, the country's current account deficit will gradually improve over time as a slow decline in the dollar's value improves the country's trade performance by making US products cheaper in foreign markets and foreign goods more expensive in the US.
(Washington Post 050916)

***A bit of a good news. Both Canada and the US still have their humungoid capital debts to contend with on top of their trade deficits.***

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