Understanding our Current Account Deficit

Paul Blustein has two of the best articles I've seen about our current account deficit in terms of clarity and human interest. Go read them both:

For now, the imbalance between the United States and Asia benefits the economies on both sides. Asians get jobs in export firms such as HJC Helmets, and their American customers get high-quality, inexpensive goods including clothing, cars and appliances. The United States also gets cheap capital from Asia because the dollars that Asians earn for their exports often end up invested in the bonds of the U.S. Treasury and mortgage-finance companies such as Fannie Mae and Freddie Mac. These purchases of U.S. securities help keep interest rates low, which in turn helps fuel the housing boom and create new U.S. jobs that replace the ones lost to imports.

"We get cheap goods in exchange for pieces of paper, which we can print at a great rate," said Allan H. Meltzer, an economist at Carnegie Mellon University.

However, the mountain of U.S. bonds that foreigners are accumulating means the United States is going deeper into debt to fund its import binge, to the tune of about $3 trillion as of this year.

If it were any other country behaving in this reckless fashion, disaster would not be far around the corner. But we are not any other country. We are the United States, thus there are some factors working in our favor:

a) We are considered too big to fail.
b) Our creditors are central banks rather than private investors. They act not to maximize profits on their investment but to grow their economies and maintain stability. They know if we fail, we'll drag them all down into recession with us.
c) The dollar is the world's default currency, which has several implications, not least of which is the fact that we hold all our debt in our own currency -- if the dollar goes down, our debt shrinks automatically. Not the case if you are Argentina.