In theory, current and capital accounts on BOP balance each other out, since foreign reserves are effectively a plug. Where there's a minor imbalance, its usually a statistical discrepancy. So if the US - for example - runs a current account deficit (CAD), it will likely run a capital account surplus.
The US has also been running large fiscal deficits since more than a decade which has led to increased issuance of USTs and internal borrowing from Social Security Funds which should be used to fund baby boomers' retirement. When SS payments come due, will US be able to fund w/o depreciating the dollar?
The US is now using world savings to meet its local investment and consumption needs ie net debtor to rest of world - total debt is $20tn at this point. A third is owed to intra-governmental agencies (SS funds mainly) and two thirds to the public.
The US has also been running large fiscal deficits since more than a decade which has led to increased issuance of USTs and internal borrowing from Social Security Funds which should be used to fund baby boomers' retirement. When SS payments come due, will US be able to fund w/o depreciating the dollar?
The US is now using world savings to meet its local investment and consumption needs ie net debtor to rest of world - total debt is $20tn at this point. A third is owed to intra-governmental agencies (SS funds mainly) and two thirds to the public.
In the longer term, the US can be expected to be severely indebted - and debt/GDP is beyond 100% already. That has happened because USD is still the global standard (can just print). China has been calling for a replacement for a while now - yuan did become a reference reserve currency and joined the USD, GBP, EUR and Yen club in 2014/2015.
Since China pegs the yuan (+/- 2-5% of 6.25/USD), and has to print yuan to buy dollars to maintain this peg (to avoid yuan appreciation), it builds a pile of dollars which it will eventually lend to US by investing in UST. This is effectively China funding US to buy Chinese products and continue to run CAD. Same with Japan.
If China lets yuan float after having built up these reserves of USD, yuan appreciates which causes the value of held USD reserves to decline. China will also stop buying, or even sell, UST which might lead to increase in LT interest rates which means lower consumption / low growth. Hard to get out of this situation for either country.
Below is an interesting table i found the UST website. Total is c.$4tn in UST.
Will go into China's current debt situation soon.
Since China pegs the yuan (+/- 2-5% of 6.25/USD), and has to print yuan to buy dollars to maintain this peg (to avoid yuan appreciation), it builds a pile of dollars which it will eventually lend to US by investing in UST. This is effectively China funding US to buy Chinese products and continue to run CAD. Same with Japan.
If China lets yuan float after having built up these reserves of USD, yuan appreciates which causes the value of held USD reserves to decline. China will also stop buying, or even sell, UST which might lead to increase in LT interest rates which means lower consumption / low growth. Hard to get out of this situation for either country.
Below is an interesting table i found the UST website. Total is c.$4tn in UST.
Will go into China's current debt situation soon.
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