Until recently, China actively purchased US Treasury securities in order to limit the appreciation of its currency. (Currently it is losing foreign reserves). Explain what are the possible effects of this strategy on US interest arte and value of its own currency (i.e., appreciation or depreciation). Should the USA be worried about China suddenly deciding to sell its holdings of US treasury bonds? Why or why not? Do you agree? Why or why not? How do you explain the fact that since the financial crisis the US government budget deficit has exploded, yet at the same time the US Current Account deficit has actually decreased. What happened to the ‘twin deficits’ hypothesis?
According to Krugman, the USA should not be worried about China
suddenly deciding to sell its holding of the US treasury bonds.
While this move might depress the U.S dollar, the move is good for
America as the value of U.S exports to China would grow steadily.
With a low value of the dollar, the U.S exports will make their way
to China which will improve the balance of payment. Yes, I agree,
the effect on America would be small. As for China then Yuan would
improve but the later will shift spending towards imports and
America will spend more on the exports. China will, therefore, more
of the U.S products which will boost the U.S exports.
Speaking of the U.S deficit, Krugman maintains that the budget
doesn’t have to be balanced to put the country on a fiscally
sustainable path. The deficit should be small enough that debt
grows more slowly than the economy at any time. Krugman argues that
the act of borrowing in US own currency and printing more money is
unlikely to generate difficulties at the face of the high national
debt. For this reason, the crisis of US government budget deficit
explosion will not affect the economic growth.
While the US current account deficit has actually decreased, the US
government deficit has exploded because of US government’s
inability to raise as much money as it spends. Additionally, there
is the issue of wealth and power inequality which has seen some
members of the society become wealthy and some are still
poor.
Speaking of the twin deficits hypothesis, there should a strong
link between a national economy’s current account balance and the
government budget balance. The twin deficit hypothesis has been
reversed in the US because of a large federal deficit and equally a
formidable trade deficit. Essentially, the deficit is good as it
facilitates a rapid economic growth. The link between the national
economy’s current account balance and the government budget balance
is pretty wide because the increased government spending have
reduced unemployment which has, in turn, boosted productivity
resulting into an increased GDP
The increased GDP have led to an reduced current account deficit,
but the government deficit haven’t reduced because of the increased
government spending to boost the economic growth
Until recently, China actively purchased US Treasury securities in order to limit the appreciation of its...
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