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What possible adjustments if the US external deficit becomes very large?
The US external deficit became very large from 2002 to 2008 and is now set to become so again. When this deficit becomes very large and therefore difficult to finance spontaneously, two adjustments are possible: An interest-rate adjustment: dollar long-term interest rates rise in order to attract the capital needed to finance the external deficit, and the yield curve steepens ; An exchange-rate adjustment: interest rates do not rise and the yield curve remains flat, but the exchange rate depreciates to the point where the necessary capital returns to the United States. It was the second type of adjustment that took place from 2002 to 2008, which leads us to predict that the US yield curve will remain flat and the dollar will depreciate.
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Patrick Artus
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