US Deficits and Dollar

In the phase of recovery from massive breakdown, US should launch new policies to avoid large external deficits, balance the budget and adapt to a global reserve currency If implemented adequately, these would initiate the confidence in recovery and to build the foundation for sustainable US Economy over the long haul. This will not only bring an economic stability but reduction of regulation on a national currency would benefit the national security as well.

US should recognize the dangers of Dollar being global currency. Their current and trade account deficits have declined sharply over the last three years. If not regulated correctly this record deficit may increase 10 folds in upcoming decade or so. Taking the role of dollar as the global currency, US has benefitted from it with much easier financing. Its because of this that  large trade and current account deficits with the rest of the world over 30 years. Also the subsequent inflow of capital turned out to be an important cause of the current economic crisis. This may be due to loosened monetary policies, reduced to near nil Interest Rates, excessive liquidity and many more.

In investing terms, the large external deficits pose a big threat to US Economy. This is because the investors might at some point refuse to finance these deficits. Any such happening would drive down the Dollar Value leading to Devaluation, Inflation and poorer image of US to world Economy.  

Due to higher budget deficits, domestic demands of foreign goods increases leading to larger current account deficits. Also if the rest of the world again finances US the conditions of the Financial Crisis may get replicated. Even if all these are properly checked the investment for foreign debt may erode the Standard of Living of US Citizens.

There is a need for the Fed Bank to recognize the large external deficits, the dominance of dollar, and the large capital inflows are in no interest of US. So as to add to this point China stressed on the development of a new reserve non-national currency to facilitate equal proportionate development in every nation.

Balancing the budget is the only reliable policy instrument  for preventing the buildup of foreign deficits and debt for US Also there is a need to restore a budget that is balanced neatly over Economic Cycle. The policy should be developed in a manner to aid the nation with surplus in phases of requirement and to add to the nation’s deposits in the time of boom.

Also with the weakening stance of US Government and its inability to restore economic balance will degrade its position in world economy. Dollar being the national currency, US is majorly dependent on foreign creditors like China, Japan, France etc.