The Deficit Twins, are, at best, fraternal, not identical. In the last six years, US defense spending has risen 60%and four-fifths of this increase has taken place just since the present Administration took office. US defense spending has now hit a running twelve-month total $522 billion—a gargantuan sum which is almost a dollar-for-dollar partner to the trade deficit and which is a fairly good match for the total Federal budget deficit. Thus, not only do we have Twin deficits at present, but one of the Twins wears combat fatigues and carries an M-16 rifle. [Full Article]
Source link: http://archive.mises.org/2441/the-twin-deficits-myths-and-truths/
The Twin Deficits: Myths and Truths
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Thanks to Mr. Corrigan for another excellent article!
On the containers mentioned in the article, this bit from Doug Noland’s Credit Bubble Bulletin (Link)helps put some numbers on the acreage:
On private savings, the latest Personal Income and Outlays report from the BEA(Link) shows personal savings as a percentage of disposable income at a measly 0.6%. I did theorize that this number is being driven down partially as a result of the housing bubble, where people are leveraging larger and larger mortgages. However, browsing through the BEA definitions, durable goods are defined separately from structures, and I can’t find a structure expenditure listed in this report. So it would appear that expenditures on housing are over and above those contributing to the low savings rate. I anyone knows the answer here I would like to know.
On Mr. Corrigan’s bullet items at the end, it is a fact that more than half of US currency circulates outside the country, in some places either as official or defacto currency. I can’t believe that these people are going to decide to suddenly dump their dollars.
My observation has been that, over the past couple of years, the dollar’s exchange value appears to have been driven primarily by interest rate arbitrage. The absurdly low, negative real, short term US interest rates cause a net investment flow to currencies where a higher interest rate can be obtained. I see the danger for the dollar being this: if the economy continues to weaken the Fed will stop raising rates, causing the dollar slide to resume. I see the fall in the dollar as being primarily caused by the Fed manipulating interest rates, not as being caused by the deficits.
As for monetary inflation, I still see no evidence in the Fed’s numbers (Link)of the Fed monetizing the federal budget deficit. The amount of new money being injected, while still objectionable, remains relatively low. Price inflation may occur in some sectors (oil-related, for example), but that will still be offset by productivity improvements in other sectors.
Also, money spent on oil-related goods is money not spent on other economic goods. This causes a strain in industries at the margin (custom puppy candies, for example) which tends to depress prices and affect employment there. Given the recent high-flying, credit-fueled economy, I think there are a lot of industries existing in that margin. I expect overall CPI (manipulated or not) to remain relatively tame in the near future.
Of course, it cannot be expected that budget deficits and trade/current account deficits will follow each other perfectly, which is what the “Twin deficit” (Most people associate “twin” with identical twin) term imply. Because for one thing, the current account deficit is determined by a lot of other factors such as the public´s time preferences and the willingness of companies to invest.
Moreover it is not even likely that a budget deficit will even ceteris paribus increase the current account deficit by an equal amount as this would imply that the public have such a high time preference that they would spend 100% of their increase in their disposable income or that there would be no reduction in investments. However it seems equally unlikely that a budget deficit would have no effect on the current account deficit as this would imply that the public have such a low time preference that they would save 100% of a increase in disposable income or that corporate investments would be reduced sharply. The most likely effect of a budget deficit on the current account deficit is therefore a increase in the current account deficit, but not as large as the increase in the budget deficit.
However if we look at the current situation in the United States, given the high time preferences of the US population and given the disincentive for saving created by the negative real interest rates created by Alan Greenspan the budget deficit is unlikely to have increased private savings in any significant way. This is also reflected in the latest news(Link)that the US household savings rate hit a near all time low of 0,6% in July 2004 (A lower rate then before the Bush tax cuts and spending increases), the assumption that the public has saved any significant amount of the Bush tax cuts seems extremely unrealistic. Therefore without the Bush expansion of the budget deficit, the current account deficit would most likely have fallen in recent years as they normally do during recessions instead of rising as to new record levels as it in fact have.
The most important reason, that the inflation is contained, inspite of falling dollar is that instead of printing money, which will increase inflation or selling bonds, which will increase the interest rate; the federal government is just dipping in the Social Security and Medicare Trust Funds.
If this would have been any other Trust Fund, then the trustees, Members of the Congress in this case, would have long been fired and charged with crime.
Defense Department is still wasting too much money, e.g. small pox vaccination, decapitation strikes, shock & awe with speed record of 3 weeks to Baghdad while leaving the pockets of weapons and Saddam Loyalists behind. This is sheer lack of training, experience, patience and education as to how campaigns are conducted.
Now even Greenspan is suggesting that Social Security money be used to pay off the national debt. Why don’t we cut off the aid to UNO a little bit first, before dipping in TRUST Funds.
We also need to stop the IMF and World Bank Racket. Taking tax money from poor people in rich countries, giving it to corrupt politicians in poor country OR so called Experts and Consultants from the Rich country, who just clean it up; and then IMF or WB will hold the nation hostage like a Loan Shark, and make the poor people of poor country pay it with interest to the rich country. But that is another racket.
They have violated the trust that the people of USA have placed in them.
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