Is the U.S. Current Account Deficit Sustainable? If Not, How Costly Is Adjustment Likely to Be? MANY ANALYSTS IN academia, the private sector, and applied research

institutions express increasing concern about the growing U.S. current account deficit. There is a general sense that current global imbalances are unsustainable and that adjustment must come sooner rather than later. The unprecedented magnitude of the U.S. current account deficit and the United States ’ growing net foreign indebtedness have fueled these worries, with many analysts arguing that, unless something is done, the world will move toward a major financial crisis.1 Some have gone as far as to suggest an imminent collapse of the dollar and a global financial meltdown.2 Underlying this view is the fact that, if the deficit continues at its current level, U.S. net international liabilities will eventually reach 100 percent of GDP, a figure widely considered to be excessively large.3 The source of financing of the U.S. current account deficit has also become a matter of concern. A number of authors have argued that, by relying on foreign and particularly Asian central banks ’ purchases o