The Current Account deficit for the US is at this moment $123 billion per quarter and 3.3% of GDP. This is less than the 6% in 2006 but still at a level that most economists consider to be unsustainable in the long term. The decline is probably caused by the economic situation and could be temporary. So, what does this mean and what is ahead for the US?

In this article we focus on what the consequences could be for the US given its large Current Account deficit and the factors that are driving this deficit.

This article is the sixth and last in a series of six that explains the economic concepts of Current Account, Capital Account and Reserve Account and how they relate with foreign debts, public deficits and currency exchange rates. If you are interested to get an understanding of how the economy works, how money flows between nations and its impact on currency trends and the economic well-being of nations, please read on.

If you just want to know more about stock market timing signals that tell you when to buy or sell your funds, please read here more about Stock Trend Investing.

The US Situation

In the previous article we looked at four main factors that can drive a large Current Account deficit. Which of these factors are driving the Current Account deficit of the United States?

For the US issues 1 and 3 seem to drive the Current Account deficit:

• 1) A large public deficit that cannot be financed domestically.
• 3) Much higher imports than exports.

In the future the situation can become more severe because also issue 4 – the costs of large foreign funded debt – can start driving up the Current Account deficit furthermore.

Enormous Economic Boom

And what can we expect for the US as a result of this? The ideal scenario would be an enormous boom in economic growth fueled by exports, domestic investments and consumption of domestic produced goods. In such a scenario, debt and deficits as a percentage of GDP would reduce and the country would grow out of its debt and deficit problems.

But what would fuel such an economic growth. It will definitely not be consumer credit and housing mortgages. Those are maxed out and need deleveraging. Corporations seem to sit on a lot of cash and when they invest that, this could drive the growth. So far they seem to be cautious and rather spend it on mergers and acquisitions than that they make new investments. And who can blame them if consumer demand is not expected to grow with high unemployment and deleverage of the housing and consumer credit markets.

Note that when companies spend their money on mergers and acquisitions, this may be good for the stock markets in the short term but it is not driving the real economy. One of the objectives of M&A is always utilizing the synergies. In other words this means often to reduce costs: less investment and fewer employees. And the money that is paid in the M&A process to the selling shareholders is very unlikely to be spent on consumption and much more likely to be invested in safe equities and bonds.

Tighten the Belt

What is left for the US? As we described in our previous article when large Current Account deficits are driven by higher imports than exports and large public deficits, the only other solution than a miracle in economic growth is to tighten the belt. This means to reduce consumption, to lower imports, to reduce public spending and thus to reduce living standards in monetary terms.

Do you see any US government or Congress to take very unpopular but long term necessary actions to turn the current deficit situation around? My guess is not until there is a huge crisis and there is no other option. Therefore, a more likely scenario is to continue the monetary easing policies. Everything will be done to avoid big shocks. But gradually over time the US Dollar will probably devalue more and more compared to the Asian currencies (the Japanese yen is a separate story), the British Pound and maybe even the Euro.

In Europe, the economic growth potential maybe lower than in the US due to demographics and lower mobility of the labor population, but I have the impression that most of the European countries in general seem to be more determined to tackle the deficit problems. There will always be some exceptions of course. Future will tell.

Asia Preferred

Overall I see for the next decade the Asian countries (excluding Japan) as better stock market investment opportunities than the US. Both the economic growth and currencies will be stronger in Asia. However, also here there will be booms and busts. Investors are advised to be fully aware of the directions of the market trends in the Asian market indices and to choose their moments to step in and out of the market wisely.

The following articles from this series may also have your interest:

The Current Account and How Money Flows

The Balance of Payments and Current Account Deficits and Surpluses

 The Capital Account and Reserve Account: Money Flows for Capital Investments

 How a Current Account Surplus can lead to a Weak Chinese Currency

 Four Possible Drivers for Large Current Account Deficits like in the US

These articles could also be of interest to you:

History of US federal debt as percentage of GDP: Why is this now important?

Debt or Deficit: are we into trouble compared to other countries?

Why is the Japanese Yen so Strong?

If you really want to read in detail and more "academic" style articles and reports about the US Current Account deficit situation, check these reports (some are older):

http://elsa.berkeley.edu/~obstfeld/NBER_final.pdf

http://opencrs.com/document/RL33186/

http://www.iie.com/publications/papers/paper.cfm?researchid=213

http://seekingalpha.com/article/198705-cause-of-u-s-current-account-defi...