THE ROAD AHEAD
Certainly any country facing current account deficit of 5-6% of GDP would have invited currency crises. But , well US is different case. It can finance its CA deficit by printing its own currency. Put it this way ---
If US is running deficit, some other country would be running surplus. Let say, India is running surplus with US. This inflow of extra dollars into India might drive rupee up. So RBI in order to check rupee gain would purchase dollars from the market and park them in US T-Bills earning 1.25% on them. Thus, effectively US is able to finance its CA deficit, simply by printing more dollars.
But things have changed since 9/11, interest rates are at historic lows, corporate scandals, stock market fall, etc. have shattered investors' confidence. Investors are looking at other investment avenues. This has made increasingly difficult for US to finance its CA deficit. Experts believe that all major developing countries have increased proportion of Euro in their reserve holdings.…
