The Future of the Dollar

The continued and steady current account deterioration in the USA has led it to move inexorably from being the world's largest creditor with a net surplus of US$360bn in the 1980s, to that of world's largest debtor, owing non-residents US$2.5tn, equivalent to approximately 22% of GDP at the end of 2004. The current account imbalance now runs at an annual rate of over US$700bn, and, according to Maurice Obstfeld, Class of 1958 Professor of Economics at University California Berkeley, has reached levels as a percentage of GDP unseen since the first decades of the 19th century.

The US current account and fiscal deficits (often referred to as 'twin deficits') form, unsurprisingly, one of the most popular discussion topics among international macroeconomic analysts and policy-makers. The persistence of the deficits and the resilience of the US economy, despite many gloomy predictions, will certainly ensure that even more attention and interest will be given to the subject by leading academics, investors and members of the public alike.

It is feared by many that a readjustment of the current account balance to a sustainable figure will bring about a collapse of the dollar, triggering a recession in the USA and, by virtue of globalised trade links, a worldwide economic slump. 'America's Deficit, the World's Problem', as it has been coined.

Economists are, perhaps ironically, renowned for not agreeing and this topic has proved no exception. This paper aims to review the literature critically and concisely to inform the reader of possible future economic developments.