At $857 billion and growing, the US current-account deficit absorbs the vast majority of the world’s capital outflows. To finance this chronic deficit, the United States has amassed trillions of dollars of foreign debt, leaving itself vulnerable to sudden changes in the sentiment of global investors. Many economists believe that the deficit is unsustainable and that a major correction involving a significant depreciation of the dollar looms1 (see sidebar “Understanding the current account").
New research from the McKinsey Global Institute (MGI), however, finds nothing inevitable about a correction in the US current-account deficit over the next five years. Instead, it could continue to grow, and the world would have enough capital to finance it. Any correction from shifts in exchange rates could occur very gradually, over a period of many years.
Yet while a large, sudden depreciation in the dollar is unlikely, the magnitude of today’s imbalances and the pressure they place on the dollar remain significant. Business and government leaders would therefore be wise to plan for the changes in world demand and trade that could follow if a correction were to occur.
In general, US goods and services would be significantly more competitive in the...