Federal Deficits and the Economy
According to conventional wisdom, U.S. government budget deficits compete against private investment for a fixed supply of loanable funds. The resulting increase in real interest rates attracts foreign lenders, who bid up the dollars's exchange value in their zeal to acquire higher-yielding U.S. securities. A dollar appreciation results in a current account deficit, which is a necessary counterpart to an inflow of foreign savings.
Suggested citation: “Federal Deficits and the Economy,” Federal Reserve Bank of Cleveland, Economic Trends, no. 96-11, pp. 10, 11.01.1996.