IMF Does Not See USA Austerity Measures Effecting External Deficit

September 19th, 2011
in econ_news

Econintersect: Simply, external deficit is money owed to non-residents.  The USA's external deficit is approximately $14 trillion and growing.  Most economists generally agree that external debt growth faster than GDP cannot continue indefinitely - the arguments arise debating if the current levels are in a danger zone.

The International Monetary Fund (IMF) has postulated that government fiscal austerity of one percent can reduce external deficit up to 1% - but any reduction will be diminished if:

  • nominal exchange rate is fixed;
  • the scope for monetary stimulus is limited; or
  • economies tighten fiscal policies simultaneously.

Follow up:

The study concludes that "the relatively small size of permanent fiscal measures currently envisioned for the United States suggests that fiscal consolidation there will do little to reduce the US external deficit."

One factor that diminishes the impact of fiscal austerity is the substantial private component of the Gross External Debt Position.  According to the latest reports from the U.S. Treasury, only 30% of external debt is "General Government" obligations.  Private capital and debt is less directly affected by fiscal austerity that government debt.

The IMF study showed that the highest reduction of external deficit occurred with austerity in the government sectors.  Quoting the IMF - "the response of private savings and investment to fiscal policy changes is relatively muted."

Source: wikipedia, imf, U.S. Treasury Resource Center

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

1 comment

  1. roger erickson says :

    > Most economists generally agree that
    > external debt growth faster than GDP
    > cannot continue indefinitely

    Then most economists are totally naive!

    No amount of debt, no matter whom it's owed to, is unsustainable, as long as it's denominated in a totally fiat, floating-Fx, non-convertible currency issued by the supposed debt-bearer.
    In our own case, the ONLY possible worry is currency inflation, and that word doesn't even occur in this analysis.

    Furthermore, inflation, even if it did ever occur, can easily be handled by adjusting public spending and net taxes.



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved