« Twin deficits » : The American economy living more than ever on credit.

(Les Echos 15, march 2004)

The expression “twin deficits”, coined during the Reagan administration, two decades ago, is coming back full swing. The American current balance of payments deficit, between the US and the rest of the world, reached last year 542 billion dollars, a figure close to the US government budget deficit of 521 billion dollars expected in 2004.

These are record breaking figures. The first one shows that the number one economy in the world needs more than ever the savings of the rest of the world to finance its purchases abroad. The second one shows that the federal government heavily taps private savings to finance its expenses. The country as a whole, as well as its principal economic agent, both live on credit ; a situation that is likely to go on for quite a while and to weigh once again on the value of the dollar this year.

Last year strong decrease in the value of the dollar slowed down the rise of the current balance of payments deficit. But not enough to avoid breaking a new record: the financing needs of the US by the rest of the world reached 4,5% of the US GDP. Every year the country must attract a slice of world savings equivalent to the GDP of Australia.

The fund flows illustrate this phenomenon : last year 856 billion dollars entered the US, while only 277 billion dollars went out ! Foreign central banks, primarily those of Japan and of China, were the most active, with 207 billion dollars of purchases of American securities, of which 128,5 billions were Treasury bonds. In the case of Japan, these massive purchases had the effect of slowing down the fall of exchange rate between the dollar and the yen. Exchange rates tensions were mostly felt with the Euro, with a negative impact on European growth, since the ECB did not deem appropriate to follow the same strategy as Japan.

Unlike the budget deficit that should sooner or later translate into a tax rise and a rise in interest rates, the financing of the current balance of payment deficit is more a problem for the rest of the world (excessive use of its saving capacity) than for the US. “It is probable that the current major financial imbalances will be corrected without disturbing much the economy nor the financial markets”, Alan Greenspan, the head of the US federal reserve board, said recently. Most of the deficit is explained by the trade of merchandises imbalance : the commercial deficit reached last year 490 billion dollars, compared to 418 billions the year before.