United States Deficit - Essay Example

The United s deficit The United s deficit, on current account is now running at an annual rate of 700 billion dollars. This deficit is draining up over three quarters of the worlds available external surpluses. If the deficit is to continue at this pace, the U.S could ultimately converge to an external debt/GDP ratio around one. Analysts claim that rapid adjustment of the deficit towards balancing will demand that a sharp depreciation of the U .S dollar. At the end of the Fiscal Year 2011, the estimated ownership of Federal Debt that was held to the public included 16 % of the Federal Reserve, 6 % of State and Local Government, domestic and private investors 32% and the major portion of was the international investor who offered 46 %.

These are the four most important places where U.S was able to borrow money from. The international investors like BP, DaimlerChrysler, ING group which are located in different countries like U.K and Netherlands provided the U.S with a major portion of the credit. Once this money is borrowed, both parties have to come into an agreement on how the interest will be paid. Once the U.S has borrowed money, they will pay the interest rates depending on each countries agreement with the U.S government.

They can also exchange privileges. This means that that the U.S government can give an investor the opportunity to be able to switch from one mutual fund to another with the family without paying sales charges. Credit rating is a method used to evaluate the credit worthiness if a debtor and this can be a business or a government. This is done by a credit rating agency like Moody’s, Fitch Ratings and Standard & Poor. . The credit rating of a government like U.S is a financial indicator to potential investors of securities like bonds.

The Credit rating agency Standard and Poor (S&P) downgraded its credit rating of the U.S federal government from AAA (outstanding) to AA+( excellent) by the third quarter of the year 2011. This seems not to be good news to the U.S as international implication of public deficit will lead to higher current accounts deficit, it will also increase the risk of capital flight this affecting the image of the country. This will make international investors to shy away from investing in this country.

The current account is a component of the balance of payment while the other being capital account. The current account balance measures the nature of a country’s foreign trade. The capital account determines how international capital flows and investment are recorded in the capital account. In 2011, U.S recorded the highest deficit ever. However, new evidence indicates that the U.S Current account deficits are being moderated by positive valuation effects. This means that the assets that the U.

S has oversee seem to be gaining value in relation to the ones being held inside the country by foreign investors. This is an indication the U.S foreign assets are not diminishing in value therefore hold more leverage on a one on one basis with the current account deficits. This has made international borrowing quite a difficult task as people are afraid of the current account deficit worth – 773, 441, 151, 000 $ that the U.S hold but still want to risk investing in it due to its international investment position.