Account Balance 1a) the Model Term Paper

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98 at the end of 1997. This is reflected in both an increase in credit card debt and sharp increases in housing prices. The latter is the single largest source of debt for most consumers, and increases in housing prices have meant that increasing proportions of incomes have been diverted away from savings and into mortgage debt. When combined with governmental aversion to deficit budgets, the result is not only a strong increase in current account deficit but that this is being born almost entirely by consumers.

The implications of this according to Eatwell and Taylor is looming economic ruin. They view the present situation as essentially unstable, in particular compared to the situation in the 80s. They approach the issue from the perspective of U.S. domestic economic policy. They assume no major change in Japan's situation, and only a modest reduction of current account surplus in Europe, stemming from the adoption of the Euro and expansion of the EU into the eastern parts of the continent. In light of this, their view is that the U.S. must continue its present level of current account deficit for the foreseeable future. The burden, they feel, should be shifted back towards government. They view the consumer as unable to sustain their present debt levels, so the governments must run deficits in order to make up the difference.

The economic policy in recent years mirrors in many ways the policy in the 1980s.

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The war on terror, in particular the Iraq situation, has increased U.S. government spending. The federal government is no longer averse to deficit spending, which is akin to the Cold War spending-fuelled deficit budgets of the Reagan era. The result of this has been a shift back towards the government and away from the consumer, of the burden of the current account deficit.

The other major policy similarity between now and the 80s is the reduction of the U.S. dollar. This is an area of U.S. government policy in that the Federal Reserve has some control over the value of the dollar with its interest rate policies. The dollar rose significantly through the 90s and early 00s, but has since seen a strong devaluation. Eatwell and Taylor hinted at the need for, and strong possibility of, a devaluation in the U.S. dollar in their article. This decline reduces the current account surplus by reducing the value of U.S. holdings in foreign countries, which are often denominated in foreign currencies. The 80s saw similar exchange rate corrections, which helped maintain a degree of balance in current accounts.

Both exchange rate policy and federal budget deficit policy are similar to what we saw in the 80s and different from what we saw during the 90s, except during the Bush years at the beginning of that decade.

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