Valuation Effects and The U.S. Current Account Deficits
Valuation effects have been increasingly important for the U.S. in the last two decades, given a dramatic, sharp rise in international cross-country portfolio holdings. For the U.S., valuation effects are partly compensating its current account deficits and therefore mitigating the decline of its net foreign assets.
During 1994-2007, the U.S. accumulated more than US$5 trillions in current account deficits. This figure will be rising at least in 2009 and 2010. The phenomenon understandably raises a lot of concerns about the size of the U.S. external debts, because a high, unsustainable external debt can result in painful debt service and/or sharp currency depreciation.
New evidence, however, suggests that while the U.S. has been experiencing large, persistent current account deficits, the assets U.S. investors hold overseas are gaining more in value compared to the value of U.S. assets held by foreign investors. These positive valuation effects represent financial gains for the U.S. (some attribute this phenomenon to exorbitant privilege). Economists at the Federal Reserve estimated that during 1994-2007, the U.S. valuation effects (in stocks and bonds) are about +$1.2 trillion, about 22% of the U.S. total current account deficits,.
Read more about this topic: Valuation Effects
Famous quotes containing the words effects, current, account and/or deficits:
“The machines that are first invented to perform any particular movement are always the most complex, and succeeding artists generally discover that, with fewer wheels, with fewer principles of motion, than had originally been employed, the same effects may be more easily produced. The first systems, in the same manner, are always the most complex.”
—Adam Smith (1723–1790)
“Beneath the azure current floweth;
Above, the golden sunlight glows.
Rebellious, the storm it wooeth,
As if the storms could give repose.”
—Mikhail Lermontov (1814–1841)
“He who is only a traveler learns things at second-hand and by the halves, and is poor authority. We are most interested when science reports what those men already know practically or instinctively, for that alone is a true humanity, or account of human experience.”
—Henry David Thoreau (1817–1862)
“Don’t forget what I discovered—that over ninety percent of all national deficits from 1921 to 1939 were caused by payments for past, present, and future wars.”
—Franklin D. Roosevelt (1882–1945)