Essay about Fluctuations in External Stability

External stability – stable exchange rate, a sustainable level of foreign debt and the current account deficit (CAD) 

Although Australia remains geographically isolated from the world, international trade still remains a main factor that allows Australia’s economy to prosper. Australia’s long history of trade has created tight links and connections with other nations. Being a member of many worldwide organisations, Australia has produced many free trade agreements with countries around the world. However, recently Australia has seen a change in the composition and direction of its trade and has developed a strong trade link with the Asia-Pacific Region.

This growth in national debt has blunt consequences on inflation, interest rates and growing economy. Foreign control of large amounts of government debt means that the taxes will have to be raised to repay debt and percentage owned to overseas governments which is not acceptable. Assuming that trade deficiency also exists it will lead to depreciation of dollar which effect its position as a reserve currency, and if during this process any new currency emerge as a replacement of reserve currency, higher interest rates will be required to sell the debt to foreign countries (Inflation). Raised interest rates have a negative impact on the economy and high accumulation of debts leads to high interest rates (Spending). Hence the economy suffers. This means that the funds for government programs like Social Security and Medicare are not enough (Economic Progress Under Obama). Another consequence of high national debt is the reduced flexibility in fiscal policy (Spending).

There are numerous reasons for the sudden decline in value of Australian currency, one of which is the renewed strength of the US dollar, due to the American economy’s acceleration through its recovery. However, there is the additional fact that the RBA has been cutting interest rates, resulting in Australia becoming a less attractive place for investors, as well as the continual impacts of deteriorating commodity prices

The cost of servicing foreign liabilities is a major problem. As the level of foreign debt increases a depreciation in the value of the Australian dollar could make it more difficult in debt servicing and therefore cause foreign debt to grow. (Trading Economics, 2015) As shown in the two

The relative size of Australia’s interest repayments overseas is the major cyclical factor affecting the CAD through the net primary account. The changing value of the exchange rate and lead to the valuation effect, where the Australian dollar value of debt denominated in foreign currencies will alter. Hence is there were to be a depreciation of the Australia dollar in global

The United States deficit contributes to its debt and the debt contributes to the deficit. We know the longest running uninterrupted surplus for the Unites States was from 1920 to 1930 but spent most of it combating the war. This will show how the U.S. deficits, debt, and surplus affect the following areas; the taxpayers, future social security and Medicare users, unemployed individuals, University of Phoenix students, The United States financial reputation on an international level, a domestic automobile manufacturer (exporter), and a Italian clothing company (importer).

The Australian economy marks external stability as an important objective because it can influence other important aims such as economic growth, unemployment and inflation. External stability is the concept of sustaining a nation’s external accounts so that in the future, it is able to service its foreign liabilities and can avoid currency volatility. When looking at external stability, we must examine Australia’s balance of payments, which records all economic transactions between Australia and the rest of the world. Australia’s balance of payments has two components, which is the current account and the capital and financial account. The current account measures the receipts and payments for trade in goods and services, transfer payments and income flows, while the capital and financial account shows international borrowing, lending, purchasing and sales of assets.

The Congressional Budget Office (CBO) projects that interest payments on US debt will increase from 1.2% of GDP in 2009 to 3.9% in 2020, which could significantly dampen GDP growth. Mankiw projects that the current deficits have already reduced national income by 3 to 6 percent, which could conceivably increase in the years to come.

Furthermore, the nation will go deeper into debt with the rest of the world as Americans continue to rely on the strong flow of foreign money, particularly from central banks in Asia, to finance the trade gap. China, Japan and other foreign governments are some of the biggest holders of government securities, lending money to cover the substantial federal budget deficit and helping to keep interest rates and home mortgage costs here relatively low. As a result, American consumers are able to spend more and save less.

The second key national interest of Australia is the economy. Australia’s capital, jobs, standards of living, technological innovations and social advances rely substantially on exports and commodity values within Southeast Asia and the Pacific (Department of Foreign Affairs and Trade 2016a). The stability of South East Asia and the Oceania

It is often suggested that the large current account deficit poses a serious financing problem for the United States. Each year, the lament goes, the United States must attract net inflows of capital sufficient to "cover" the huge current shortfall. But this proposition gets the logic backward: the U.S. deficit is "financed" by net capital inflows only in an ex post accounting sense. In economic terms it is more nearly correct to say that net capital inflows cause the current account deficit. (p. 218)

Debt crisis is noted by Pescatori and Sy (306) to be a term that had before 1990s been used to typically refer to defaults in debt serving. This definition however became very problematic with the emergence of the sovereign bond markets. Debt crisis therefore generally deals with nations as well as their ability to repay loans that they had earlier borrowed. The concept therefore deals with international loans, national economies as well as national budgeting. An accurate and definition of debt crisis does not exist since no standard definition has been advanced. The definitions of the term have generally been noted to have varied over time with various institutions like the International Monetary Fund (IMF) as well as Standard and poor (S&P) providing their own views. The most basic definition and one which is generally accepted indicates that "debt crisis" is when a national government is not able to repay the debt that it owes as therefore resorts to seeking of some forms of assistance.

There has been a slow growth trajectory noted all over the world since the latest crisis, and one of the key and largely overlooked reasons for this disappointing growth is the increasing global burden of debt. Although it is true that low government debt has its benefits and both private and government debt matter, the main focus should now be on reducing private debt as it is larger than public debt and has the larger and more direct impact on economic outcomes, and addressing the issues associated with private debt is necessary

Current Account Deficit. A rise in the ratio of the current account deficit to GDP is generally associated with large external capital inflows that are intermediated by the domestic financial system and could facilitate asset price and credit booms. A large external current account deficit could signal vulnerability to a currency crisis with negative implications for the liquidity of the financial system, especially if the deficit is financed by short-term portfolio capital inflows. Financial crises that have