Macroeconomic imbalances in the United States and their impact on the international financial system

The argument put forward in this paper is twofold: first, that the financial crisis of 2007/08 was made global by the U.S. current account deficit. This is because the outflow of dollars from the United States was invested in U.S. capital markets, causing inflation in asset markets and leading to a bubble and bust in the subprime mortgage sector. Second, there is global dependence on the U.S. trade deficit as a means of maintaining liquidity in financial markets. Since the U.S. dollar is the international reserve currency, international debt is mostly denominated in dollars. Because there is a high degree of global financial integration, any reduction in the U.S. balance of trade will have negative effects on many countries throughout the worldfor example, those countries dependent on exporting to the United States in order to finance their debt.