What does this article mean by having twin deficits and what are the ramifications for running these deficits?

Question

http://www.kiplinger.com/magazine/archives/2006/11/siegel.html

This is the link to the article. I'm confused by it and could use a little help in understanding it. Thanks for any help provided!

Answer 1

I learned this back in college and have a faint recollection of what it meant. There are two balance of accounts, one relates to the difference between the taxes that the government takes in and the expenditures it incurs throughout the year (Taxes-Expenditures). The other account is the trade account which relates to the exports vs imports (Exports-Imports). Therefore, if the United States is running a double deficit, it means that the government is spending more than they are collecting in taxes and the country has imported more than it has exported in financial terms.

Most economist agree that it is favorable to export more than you import to a point, and the government tries to not spend more than it collects in taxes.

Answer 2

It's the trade deficit and the budget deficit. Both weaken the dollar. Eventually the U.S. will have to create more money to actually pay off the national debt if the U.S. doesn't get the national deficit under control. South America did that and that's why they had massive inflation. Inflation, by definition, make stuff worth less.

Trade deficits is about the lopsided transfer of currency. You might buy a Sony TV in the U.S. with dollars, but the company wants yen. So dollars haveto turn into yen. There is just so much yen and dollars in the world. Dollars are then used to buy yen from Forex to give to Sony. Now here comes the tricky part. Since the dollars are not flowing back to the U.S. because they literally, in this case, become yen and the Japanese are not buying as much U.S. products. So more dollars are being used to buy fewer available yen. This is happening all over the world. So as other currencies rise against the dollar, the dollar falls. This makes traveling to Japan more expensive, but cheaper for the Japanese to buy stuff in the U.S.

So what are these foriegn countries buying in the U.S.? The number one export is entertainment (music, TV and movies) but a lot of piracy doesn't provide much income back to the U.S. 80% of all media in China is pirated. Foriegn countries also buy a lot of U.S. real estate, T-bills and stocks.

Foriegn countries are buying so many T-bills that the U.S. can have that low interest rate. At some point, China (the biggest buyer of T-bills) can cash out causing the interest rates in the U.S. to go through the roof and the U.S. going back the 13% U.S. savings bonds like in the early 1980s so that the U.S. could give the money back to China (the U.S. could also print money which would create inflation as well). Things like gas prices and food would rise.

Answer 3

One is the deficit created by the government spending more that takes in in taxes. It must borrow the difference and pay interest on it. It also can cause inflation.

The other is the deficit created by importing more than is exported. It transfers our wealth to foreigners. They can use the excess cash to buy our companies and bonds. This gives them increasing control over the US and what it can do.