The United States’ Budget Deficit

In his article, “Trouble, Trouble, Debt, and Bubble,” William T. Tabb (2006) writes that the United States is importing far more than it is exporting.  The high consumption of the United States is due mainly to the reason that the rich people of the country must maintain their upper class status and high standards of living.  But the country is not earning enough to support its expenditure.  At one time or another, the United States would also become unable to pay the interest on the foreign debt that it is using today to maintain its high consumption.  The country may become bankrupt at such time, and the rest of the world would suffer because it would not have the United States to buy its goods.

     When the United States reduces its imports in order to decrease the high consumption of its people, the aggregate demand for foreign goods would decrease substantially.  At present the aggregate demand for foreign goods in the United States is quite high.  This demand is likely to push up the prices of foreign goods and ultimately result in a global inflation.  On the other hand, when the United States reduces its demand for foreign goods substantially, a global recession may very well ensue, seeing that the United States is supporting a number of economies through its demand for their products.  The U.S. continues to play a major role in the GDP of the nations that rely on it for its high consumption of their products (Tabb).

     Tabb also mentions the relation of the U.S. dollar’s value to the global economy.  A decrease in the demand for U.S. dollars can lead to a depreciation of the value of the currency with respect to another country’s currency.  The demand curve for U.S. dollars is pushed downwards in this scenario, and the new equilibrium of the demand and supply curves reveals the new, reduced rate of the dollar with respect to the other nation’s currency (Samuelson and Nordhaus, 1998; See Appendix).  A declining rate for the U.S. dollar means that a country importing U.S. goods would find these goods cheaper than before.  The U.S. would be able to increase its exports as the aggregate demand for its products increases.  At the same time, however, the U.S. dollars held in the foreign exchange accounts of those that sell to the large U.S. consumer market today, would lose their value.  Hence, those who enjoy the blessings of the high U.S. consumption today would not be able to purchase as much as they did before with the U.S. dollars in their local as well as other foreign markets (Tabb).  Indeed, the fall of the U.S. dollar would turn out to be a curse for the global economy.

     The fall of the dollar may benefit the U.S. economy for some time.  By making U.S. exports cheaper to other countries, it would increase the aggregate demand for U.S. goods which would in turn give the United States the income that it needs to fuel high consumption.  The United States can hope to reduce its current account deficit and trade deficit through the decline of the dollar, for it is obvious that making U.S. goods and services cheaper to foreign importers may very well increase the aggregate demand of U.S. goods and services, thereby fueling the growth of the U.S. economy.  Still, the benefits to the U.S. economy may eventually be offset by a fall in the aggregate supply of foreign goods into the U.S. market, seeing as foreign nations would stand to lose by selling to the U.S. consumer market and facing a reduced dollar value in return.

     Tabb does not offer “real solutions” to the problem that the U.S. economy is facing at present.  All the same, it is obvious that the entire global economy is in danger because of the troubles facing the United States economy.

References

1. Samuelson, Paul A., and William D. Nordhaus. (1998). Economics. New York: Irwin McGraw-Hill.

1. Tabb, William T. (2006). “Trouble, Trouble, Debt, and Bubble.” Monthly Review, Vol. 58, Number 1. Retrieved from http://www.monthlyreview.org/0506tabb.htm. (10 April 2007).