Eco 360 Week Five Chapter Summary

Chapter 31

Chapter 31 discussed politics, deficits, and debt. The global current account deficit of the United States is now larger than it has ever been, nearing $800 billion, almost 7% of U.S GDP. To finance both the current account deficit and its own sizable foreign investments, the United States must import about $1 trillion of foreign capital every year or more than $4 billion every working day (Delong, J., n.d). The situation is unsustainable in both international financial and domestic political (i.e., trade policy) terms. Correcting it must be the highest priority for US foreign economic policy. The most constructive remedy in the short term is a three-part package that includes credible, sizable reductions in the US budget deficit, expansion of domestic demand in major economies outside the United States, and a gradual but substantial realignment of exchange rates (Delong, J., n.d). The trade deficit is financed by both debt (bonds) and the purchase of US assets (stocks, real estate). Bond holders receive regular interest and are paid back when the bond matures, but they are usually repaid with money obtained by issuing new debt. There is no reason that the people who get repaid the principle on maturing bonds to purchase the new issue; unless he or she chooses to. The foreign nationals who purchase US assets