The Twin Deficits in the Economy of the United States

Topics: United States public debt, Government debt, Public finance Pages: 8 (2892 words) Published: October 12, 2008
The Twin Deficits in the Economy of the United States
The twin deficits are definitely back. People that do not know what twin deficits are? The Twin deficits are the current account deficit and the federal budget deficit. The current account deficit measures the flow of money from and to other countries and measures merchandise Trade. If you put it in short words, it means exports minus imports of goods and services. The Federal budget deficit is a government’s debt. It happens when an entity spends more money than what it has. A brief surplus of Clinton’s Administration has been replaced by the deficit of Bush’s Administration. Today, “the current account deficit is larger than it has ever been, close to 800 million dollars, which is 7% of US GDP” (Gongloff 1). The Federal Budget deficit is around 9 trillion dollars. As you can tell, the US government is in a serious debt, and with the government spending giants amounts of money in the Iraq War, Homeland Security, Tax cuts and other measures, it is going to keep feeding the US deficit, which is the largest it has ever been in history. This paper addresses the many challenges of the current account deficit and the Federal budget deficit, plus analyzes the history of the deficits, what the deficits mean to the economy, how are they going to affect the US and global economy and the reasons why people are afraid of investing in the US economy. In the next chart, people are going to realize how bad the US debt is. As people know, before President Bush came into power, the economy of the United States had a surplus. Since Bush came into power the economy of the United States has owe money dramatically. In 2000, the US debt was about $5 trillion; in 2007 it was about $9 trillion. The problem is not only that the deficit is at record high, but that the government is taking to long to find a solution for the debt. Date Dollar Amount

09/30/2007 9,007,653,372,262.48
09/30/2006 8,506,973,899,215.23
09/30/2005 7,932,709,661,723.50
09/30/2004 7,379,052,696,330.32
09/30/2003 6,783,231,062,743.62
09/30/2002 6,228,235,965,597.16
09/30/2001 5,807,463,412,200.06
09/30/2000 5,674,178,209,886.86

Policies to reduce the twin US deficits typically involve an “adjustment in the external value of the US dollar and in US fiscal stance” (Miller 4). During the Administration of President Reagan, the twin US deficits were at a record high. What Reagan’s administration proposed was a “devaluation of the dollar with combined with fiscal contradiction” (2). The devaluation of the dollar was supposed to put the US back in the world markets and restore external balance. The fiscal contraction, which means to lower the fiscal budget spending, is intended to prevent from upsetting the internal balance. The way to attain fiscal contraction is by taking into action non inflationary strategies. However, in today’s US economy the government problem is that the US is lacking in private savings. The US economy “net of depreciation, private saving rate of households and businesses, combined, stood at just 4.5% of national income in 2003; that’s only a little more than half the 8.3% average recorded in the mid 1980s” (1). The deficiency in private savings is putting tremendous tension in the financial markets and in the economy, which was not the case in the 1980s. The current account deficit is equal to a nation’s current investment and saving. The current account deficit is the sum of the trade balance, the balance on investment income, the balance on labor income and unilateral transfers. In the US, current account deficit means that private investors and government are investing more than they save. Following a small surplus around 1990, in the middle 1990s the current account deficit recorded a deficit of 1% of GDP. With a huge private investment boom in the mid 1990s, the current account deficit deteriorated sharply. As private investment boom ended,...

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