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July 27th 2006

AEI examines US current account balance

In a recent white paper, the American Enterprise Institute (AEI), a think-tank with a conservative bend, examined the sustainability of the US current account deficit. The AEI focused its analysis on the net savings and investment side of the account balance equation in its attempt to ascertain the factors that influence capital flows. They concluded that the deficit is ultimately sustainable because of the variety of “wealth storage” opportunities available in the US. In other words, foreigners will continue to park their savings in US-denominated assets because of the inherent liquidity, diversity, and stability afforded by such assets. Further, the AEI argues that while high oil prices have driven vast increases in the value of oil imports, the net effect on the US current account balances may be positive because oil exporters often immediately turn around and reinvest oil profits in US securities. The AEI reports:

Today, the real trade-weighted dollar is virtually at its average level for the past sixteen years and is slightly stronger than it was in 1991, when the U.S. current account deficit stood virtually at zero.

Read More: America’s External Balances

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Posted by Adam Kritzer | in Economic Indicators, US Dollar | No Comments »

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