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How will the government cover up trade deficits that skyrocketed to 7% of the national output?

*Reuters, June 6, 2006

“Strong foreign thirst for U.S.-denominated assets means the United States can sustain a hefty current account deficit longer than others without facing risks for financing it, a senior U.S. Treasury official said on Tuesday.

Randal Quarles, the Treasury’s under secretary for domestic finance, faced questions at an international monetary conference from central bankers who expressed some concern at a current account deficit that now exceeds 7 percent of total national output.

Quarles conceded it was “a very high figure” but said the United States’ net external liabilities — its ownership of foreign assets minus its foreign liabilities — have been stable at about 25 percent of national output since 2002.

“A net external liability position of 20 percent to 25 percent of GDP is very manageable for the United States and suggests that there is substantial room for it to increase before it would begin to pose a financing problem,” Quarles said.

Treasury helps finance the deficit through regular auction of debt securities, much of which is owned by foreigners.

“There’ll always be a disproportionate demand for dollar-denominated assets,” Quarles said, noting that strong U.S. growth and its relatively open markets make it an attractive investment site for foreigners.

In his prepared remarks to the group, and in response to their questions afterward, Quarles questioned why there seemed to be “distress” over the country’s financial condition and suggested that it was overdone.

“The U.S. can sustain for a much longer period that I think many observers believe a sizable current account deficit,” he said. “There is not a reason to believe that we are on the precipice, ready to topple over and that at any moment this while thing might be ready to snap.”

The current account is the broadest measure of trade, including not only goods and services but also capital flows between the United States and the rest of the world.”

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