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Are the twin deficits in United States the sign of an imbalance?

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For those who love economic news, the twin deficits should not be a secret. This topic has indeed been discussed repeatedly and increasingly frequently in recent years, owing mainly to the situation of U.S. deficits.

The twin deficits phenomenon emerged in the 1980s, when the U.S. plunged into deficit in the trade balance and budget and did so simultaneously. The theory has now hitched to demonstrate a direct link between these two data. These twin deficits are experiencing a renewed interest since 2002, when a budget surplus saw the U.S. suddenly dive back into deficit.

The impact that these deficits may have on the economy and economic agents, is such that the key to understanding twin deficits proved to be a major challenge for the governance of the world's leading power and also affected the prominent election issue.

One should nevertheless watch the relationship between fiscal and trade deficits closely, wondering if their simultaneity is mere coincidence or is predictable. Can it be considered that these two deficits are the consequences of a single imbalance in the economy?

It will be interesting to study at first the standard theory making deficits linked and identical twins from the same cause, then followed by a discussion on thelatest theories and empirical testing that contradict or refute the very idea of a close relationship between these two deficits.

The budget deficit first, characterizes the situation for which the state spending exceeds its revenues. Keynes allowed the deficit to under-employed to support demand and thus allow the return to growth. For the Liberals, the budget deficit should be avoided and fought at all costs, they have the same opposition to fiscal policy, and grant favors to their monetary policy alone.

A state can afford to have a budget deficit in that investment as long as it remains strong. States now finance their deficits by borrowing, so there are high interest rates and the cost of the deficit can be very heavy to bear.

Tags: Deficits; US economy; twin deficits a sign of imbalance

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