The Return of American Twin Deficits

By adopting an expansionary fiscal policy at the end of 2017, the United States returned to twin deficits (fiscal and current). In 2019, the federal budget deficit is projected to reach 5% of GDP, while the current account deficit is projected to be close to 3% of GDP. Having established the existence of a positive long-term relationship between the budget deficit and the current account deficit in the United States, this article highlights the specificities of the current twin deficits. These deficits differ from past deficits, first of all in the context of the emergence of deficits and then in their financing. While previous twin deficits appeared in an underemployment economy, the current episode of double deficit occurred in a context of full employment. On the other hand, the sources of financing of the twin deficits now come mainly from non-resident private investors, whereas until 2014 it was the non-US central banks that, by placing their foreign exchange reserves in Treasuries, ensured the bulk of the financing of these deficits. In the absence of serious rivals of the dollar as international reserve currency, the twin US deficits are now financed without difficulty. However, this situation may not last. The increase in US external debt could eventually lead to an increase in US long-term interest rates and/or a depreciation of the dollar.