Topic > Global Economy Elements - 2129

The US current account deficit has grown at an increasing rate due to factors such as high oil prices, imports growing slightly faster than exports, and low US savings. We should be concerned in the long term because these trade deficits are extremely large relative to US GDP and the small US export base. This concern about ever-larger deficits implies an even greater increase in US net foreign indebtedness and external balance. The United States has at times relied on the depreciation of the dollar to reduce its current account deficit. This passive approach suggests that a depreciation of the dollar of about 6% over a few years would be necessary to produce the same reduction in the accounting deficit that would be achieved by achieving the goals of the Balanced Budget Act. If the United States continued to depend on the depreciation of the dollar, which results from changes in market conceptions, then ultimately there would be an increase in the budget deficit due to higher interest rates which would increase federal net interest payments. III. The Gold Standard was when the value of a country's currency was linked to the amount of gold the country owned. Anyone who owned the country's paper money could give it to the government and in exchange receive a nominal value from the country's gold reserves. The Gold Standard was the reason why countries became concerned with conserving their gold instead of improving their economic environment. The Gold Standard frustrated the Great Depression because the Federal Reserve raised interest rates to make dollars more valuable and thus keep people from demanding gold. Instead of raising interest rates, the Federal Reserve should have lowered them in order… middle of paper… it may be necessary to raise dormant rates; debts need to start being repaid, there should be loan reductions, and taxes should increase in an attempt to offset the loan reduction. This problem may be long-term due to the critical role banks play in the market system. In today's globalized system, a credit crisis can spread through the entire economy and eventually turn it into a global economic crisis. Side effects of this problem for banks, for example, include a lack of confidence in lending which causes reduced access to credit. This global financial crisis will most likely be a long-term problem due to its nature. Although the global economy has begun to recover from the most crushing financial crisis since the Great Depression, its financial systems remain flawed and there are internal and external imbalances..