US economy in risky quandary

Back in 2004, everyone started talking about global imbalances. With the United States' current account deficit at an alarming 5.3 percent of GDP, it was feared that the country's net foreign-debt-to-GDP ratio would climb to the point that foreign investors would demand a higher risk premium on dollar-denominated assets. The specter of a "sudden stop", a dollar crash, and an international payment crisis seemed to be stalking the global economy.

None of this has happened. Instead, the US' current-account deficit shrank, averaging 2.7 percent from 2009 to 2021. More impressive, its investment income remained positive, despite its massive net debt, meaning that debt servicing was never a problem for the US government. And yet, the US' external sustainability is hardly a foregone conclusion.

The US' current account deficit has grown significantly since 2020, reaching 3.6 percent of GDP last year－the highest level since 2008. At the same time, its net foreign debt reached a staggering $18 trillion, or 78 percent of GDP. And fast rising inflation has prompted the US Federal Reserve to begin raising interest rates and reducing its holdings of Treasury securities－moves that are likely to impede growth and increase the government's borrowing costs.