Introduction, Scope and Content

The United States current account deficit (CAD) was $791 billion in 2005, an 18.9 percent increase relative to $665 billion a year earlier.1 The trade deficit was $717 billion in 2005, an increase of 17.3 percent compared with $611 billion a year earlier. Using the estimate of nominal GDP of $12,293 billion by the Congressional Budget Office (CBO), the CAD would amount to 6.4 percent of GDP and the trade deficit to 5.8 percent.2 In mid-2005, trade with China was 30 percent of the US trade deficit and the deficit with the entire Pacific Rim about 50 percent. The North American Free Trade Agreement (NAFTA) members had a share of 17 percent.3 The current account deficit of the US absorbs more than three quarters of the world surpluses. There is valid concern as to how long the US can continue to absorb these huge amounts of foreign financing and how the world economy would react to an exit out of dollar positions. The latest available data for 2005 show the net international investment position (NIIP) of the US at $2546 billion, or 20.7 percent of GDP of $12,293 billion, equal to external assets of $11,079 billion, or 90.1 percent of GDP, less external liabilities of $13,625 billion, or 108.3 percent of GDP. These data and events generate unusual interest in the financial press and in the policy literature.