Now at more than 5 percent of GDP, the current account deficit is in record territory, it is growing, and it cannot be sustained indefinitely. We cannot foresee when the deficit will stop growing and return to more-sustainable levels, through what mechanisms this adjustment will occur, or whether this adjustment will be smooth or disruptive for financial markets and the economy more generally.
No matter how a correction of the external imbalance proceeds, however, it will involve a range of adjustments to investment, saving, and asset prices, both for the U.S. economy and for our trading partners.