Evil Twins: US Federal Budget Deficits and US Trade
One hears little today of the US “twin deficits,” a phrase familiar during the 1980s when the US had consistently run both federal budget deficits and international trade deficits. Economists hypothesized at that time that there was a theoretical and/or empirical relationship assuring the two deficits’ increasing or decreasing together.
How Do Federal Budget Deficits Arise?
Annual federal budget deficits exist whenever federal spending exceeds annual tax revenue. The US has consistently run these deficits in most of the postwar period, except during the Clinton administration in the 1990s. Fiscal year 2001 was the last time the US federal budget was in surplus.
The fiscal year 2023 budget deficit was $1.7 trillion, with tax revenue at $4.4 trillion and federal spending at $6.1 trillion. The deficit through the first half of fiscal year 2024, which ends September 30, was $1.1 trillion, with receipts at $2.2 trillion and outlays at $3.3 trillion. In order to finance these budget deficits, the US Treasury issues massive amounts of US Treasury bonds, adding every year to the total outstanding federal debt.
How Do US Current Account Deficits Arise?
Annual current account deficits occur when the US sends more funds abroad than the country receives from sources abroad. The largest item in the current account is trade (exports and imports), in which the US has run a deficit every year since 1975.
The other item in the current account is non-trade-related income flows between US residents and residents of other countries. These income flows include remittances from Americans and immigrants to entities abroad, as well as Americans’ tourist spending abroad. Mexico, China, India, and Philippines are the leading destinations of US remittances.
The US trade deficit was nearly $1 trillion in 2022, but then fell to $773 billion in 2023. This deficit varies every calendar quarter, and from year to year, often because of irregularly-timed exports of big-ticket items such as Boeing jets, and large regular imports of items such as oil, foreign machinery, pharmaceuticals, industrial supplies and car parts.
The largest US trade deficits are recorded with China, Mexico, Vietnam, Canada, Germany, Japan and Ireland. The largest trade surpluses are with the Netherlands, Hong Kong, Brazil, Singapore, Australia, and the UK. The US’s top trading partners are Canada (15 percent of total US trade), Mexico (14 percent of total, and China (13 percent of total).
The Twin-deficits Significance in the 1980s
The twin deficits hypothesis arose to explain the experience of the US during the 1980s. Observers noted that federal budget deficits and trade deficits rose and fell together, although whether there were a causal relationship in the movements of the two deficits was unclear.
At that time Americans were particularly concerned about federal budget deficits as Congress enacted the Economic Recovery Tax Act in 1981 but the Reagan administration did not cut federal spending commensurately. Some economists at the time wondered if the observed twin deficit model might assist countries control their government budget deficits. The thinking was that reducing the US trade deficit could also lower budget deficits, assuming a genuine linkage between the two deficits.
Note, however, that by the 1990s the Clinton administration brought the federal budget into surplus territory, yet the current account deficit continued into negative territory, calling into question the twin deficits hypothesis.
The Twin Deficits Narrative
The twin deficits explanatory narrative runs thusly: persistent current account trade deficits since 1975 have caused US trading partners to accumulate large amounts of US dollar-denominated foreign exchange, which were then invested in assets such as US Treasury bonds, land and other US real assets, producing capital account surpluses to offset current account deficits.
US trading partners have historically been comfortable investing in US Treasury debt, which is AAA rated, the highest level given by ratings agencies such as Moody’s and Standard & Poor. China, Japan, UK, Belgium and Luxembourg are the leading foreign countries holding US Treasury debt.
Might the Twin Deficits Provide Policy Guidance Today?
With today’s concern again over large federal budget deficits and all-time high federal debt, could the twin deficits hypothesis apply today? That is, would reduced current account trade deficits enable the US to constrain its federal budget deficits?
When the US runs both federal budget deficits and current account deficits, in effect the US federal government is borrowing from foreigners (who buy US Treasury bonds and other US assets) in exchange for imported foreign-made goods. Phrased another way, the US exports bonds (IOU pieces of paper) and imports foreign-made goods for domestic consumption.
While this exchange of pieces of paper (bonds) for foreign-made goods can be sustained, many Americans are probably quite satisfied with the results. As a nation, Americans love to consume, including imports, whether it’s $5,000 Hermes handbags from France or cheap knickknacks from China. They treat shopping as a national pastime, their motto being “Shop till you drop,” they often find it difficult to save some of their incomes for retirement or other distant future events, and readily incur personal debt (for example, on credit cards) in order to indulge their consumerist urges.
Americans’ Low Personal Saving Rate and Other Complications
But the mirror image of Americans’ consumerism is their low personal saving rate, which has hovered recently around 3 to 5 percent of GDP, and briefly as high as 32 percent in April 2020 during the pandemic when they received generous federal “stimulus” payments but had few opportunities to spend them. This contrasts markedly with China’s consistent saving rate of 40-50 percent of GDP, and Japan’s rate of about 25 percent.
Large continuing current account trade deficits are not sustainable in the long run if they increase foreign ownership of US federal debt. When foreigners own US federal debt, interest payments on this debt represent income flows leaving the country, adding to the current account deficit.
If the entire US federal debt were internally owned by US citizens, on the other hand, income flowing abroad would not be a major issue. Some Americans would simply owe US debt interest payments to other Americans, representing an internal redistribution of income from those US taxpayers who own no US bonds to other Americans who do own US bonds.
Beginning this year, the US has begun paying more interest on its federal debt than it spends on national defense. As interest rates are now more normalized at higher levels than a couple of years ago, these interest payments will only increase over time. And some portion of these interest payments flow to foreign owners of US debt. A larger debt, moreover, can be serviced only through more federal borrowing or higher net exports. And for net exports to rise, all else equal, the value of the dollar must decline and/or US workers must become more productive.
Is There a Future for the Twin Deficits Hypothesis?
Consider that one or more of the following structural or cyclical changes must occur for the twin deficits hypothesis to assist the US control its current federal budget deficits, and thus its ability to reduce its outstanding federal debt:
* Americans would uncharacteristically need to increase their saving rate, ideally providing sufficient domestic saving to purchase the new federal debt required to finance federal spending, thus reducing reliance on foreign investors.
* Tax revenues would need to increase, leaving Americans with less disposable income overall, likely causing politically divisive income distributional effects.
* Imports would need to fall, and/or exports increase, to reduce US trade deficits.
* The US dollar may need to depreciate relative to other currencies, raising questions about the Federal Reserve’s responsibility to support the USD’s stability.
A moment’s reflection reveals the limited prospect of these changes occurring. Underlying these potential changes, moreover, lurk possible immigration statutory or policy changes that might reduce current labor market tightness, thus inviting unemployment and recession that the Federal Reserve would feel obligated to respond to.
A Final Note on the Twin Deficits Narrative
This now-abandoned hypothesis from a bygone era is a reminder that economic models come and go. Yet conceivably it could emerge in some form during this current era of historically large US federal budget deficits.
Interestingly, there is no commentary in the literature about possible twin surpluses in federal budgets and trade balances. Perhaps that is because such joint surpluses have not existed in the US over any periods of time. Or perhaps it is because economists realize that there is neither a theoretical nor empirical basis for the twin deficits hypothesis, nor any basis for the existence of twin surpluses either.
If Americans are genuinely concerned about its federal budget deficits (and/or its current account trade deficits), they are well advised not to rely on the possibility of twin surpluses any time soon. Like the Easter bunny and the Tooth Fairy, twin surpluses are almost certainly a fantasy that wouldn’t absolve the US of the hard work required to clean its fiscal house and restore responsible federal spending.
EMERGENCY FINANCIAL NEWS: Economist Warns The Collapse Has Already Begun – Will Be Worse Than The Great Depression
What Will CBDCs Mean for Gold?
With the eventual introduction of central bank digital currency (CBDCs) now seemingly inevitable, there are a lot of directions central banks could take with their digital currency projects that would have dramatic implications for the price of gold.
Touted for their “convenience” and “efficiency,” the endgame of digital currencies is not only achieving greater power over the currency but also a means of surveilling and micromanaging the personal finances of each individual. Owe taxes or a parking ticket? It could be automatically deducted. Does the Fed think it needs to cool inflation? Deduct money straight from people’s accounts, or impose a daily spending limit. The possibilities for control and profit are endless, and too tempting for control freak bureaucracies and amoral tech companies to ignore.
As countries like China implement their own CBDCs, buy more precious metals, and generally buck dependence on the US dollar for trade, Western central banks also feel like they have to compete in order to retain their power. That’s the essence of the other motivation for CBDCs — a currency race between East and West wherein the winner solidifies not only unprecedented control over its own citizenry but a place atop the global power structure for the next century or longer.
Since CBDCs and the idea of a “cashless society” are mostly about increasing centralization and control on the societal and individual level, it’s easy to see how they might be accompanied by new legislation banning precious metals investing and other non-state-approved financial activities. All they need is a severe enough financial crisis to provide the justification. After all, during the Great Depression, the federal government swiftly used an Executive Order to demand that citizens submit their gold to the Federal Reserve en masse.
And with new developments in crypto-tokenization technology and a brewing global financial crisis, the Tech-Banking-Political complex is preparing for what they collectively know will be a crucial window of opportunity to force their CBDCs down the throats of the people and make opting out from their new system after the fact nearly impossible.
Once their CBDC is rolled out, central bankers will have more ability than ever to manipulate the money supply and your personal finances according to their whims. This summary from a 2023 BIS report on the promise of CBDCs to increase the scope of central bank activities describes in (cheery banker-speak) the increase in power and control that central planners will grant themselves under a unified digital currency system:
“As well as improving existing processes through the seamless integration of transactions, a unified ledger could harness programmability to enable arrangements that are currently not practicable, thereby expanding the universe of possible economic outcomes.”
Zimbabwe’s new CBDC experiment uses an interesting ”gold-backed” approach, appearing on paper to be a combination of the traditional gold standard with digital currency tech. This is a promising approach, but to avoid being corrupted by authorities, it needs a protocol that makes it nearly impossible to fake a higher gold supply with tokens for gold that doesn’t really exist. Otherwise, its claims of returning to a “gold standard” are meaningless.
I wouldn’t expect a Western CBDC to contain gold backing or the protection of any kind of restrictive protocol, but I predict that in a centralized national or international digital currency system of any kind, central banks will still hold large amounts of gold in reserve. Just as Bitcoin isn’t truly “digital gold” but only numbers on a screen, bankers know they will still have to hold real money as an insurance policy.
The difference is, that banks could be the only ones who are allowed to hold gold, while broader society will no longer have access to cash. With all other potential options to opt out of this system fully digitized and prevented from competing with CBDCs, gold, and silver will become the only way to exist and transact outside the Central Bank’s digital control grid with any semblance of true freedom or agency. Black markets will have to turn to various forms of analog money, and gold and silver will rise as the top options.
Just look at the gold chart for 1933: When Executive Order 6102 demanded that citizens give up their gold, the price skyrocketed, never again returning to pre-1933 levels. A similar effect would occur from the announcement of CBDCs, phasing out of paper cash, and restrictions on private gold ownership:
Gold vs USD Pre and Post-Executive Order 6102
Some legislators are recognizing the CBDC threat and fighting against it, declaring CBDCs a threat and empowering precious metals holders. However, I’m not sure it will be enough to fight the CBDC tide being engineered by central planners. The system may begin as optional, but with the phasing-out of cash and other incremental measures, will eventually become permanent either through direct legislation or by making it totally impractical to resist.
If the architects of CBDCs can market their new system as the solution to an epic financial crash (of their own making), it will likely appear as a sign of stability that calms global markets, possibly causing gold and silver to drop. But as precious metals emerge as the best form of physical money in a tightly controlled, micromanaged financial dystopia, they’ll become the only way to make private or off-grid transactions, making them more valuable than ever — not only as investments, but a means of survival outside the fully-digitized fiat nightmare.
EMERGENCY FINANCIAL NEWS: Economist Warns The Collapse Has Already Begun – Will Be Worse Than The Great Depression
Get Ready for Weaker Growth and Higher Inflation. The Consensus Was Wrong.
The weak GDP figure for the first quarter came with a double negative: poor consumer spending and exports, plus a rise in core inflation. The US administration’s enormous fiscal stimulus underscores the importance of considering the weaker-than-expected data.
A deceleration in consumer spending, a decline in the personal savings ratio to 3.6%, and poor exports added to a set of figures for investment that were also negative when we looked at the details.
The gross domestic product is much weaker than the headlines suggest. If we look at consumption, both durable and non-durable goods were flat or down, while the only item that increased modestly was the services factor. Residential and intellectual property boosted investment, while equipment remained weak in the past two quarters. The slump in export growth coincided with a significant increase in imports, which weakened the trade deficit. Government spending continues to rise, albeit at a slower pace, and becomes the main factor to disguise what is evidently a concerning level of growth for a leading economy with enormous potential.
It is precisely because of the unnecessary increase in government spending, designed to bloat GDP and provide a false sense of economic strength that inflation remains elevated and rises over a three—and six-month period.
Rising public debt has bloated the economy and left it at a disappointing level compared to its potential, as evidenced by higher inflation and weaker growth.
When the Fed’s preferred inflation measure rises to 2.8% in March from a year ago and the core PCE deflator rises to 3.1%, there is no strong economy. The propaganda repeatedly claims that the fight against inflation is over, but inflation has accelerated on a quarterly and half-year basis.
It is important to understand why these figures are negative. The average American household is poorer. Rising inflation and declining savings, inexistent real wage growth, employment-to-population, and the labor force participation rates remain below 2019 levels, and bloating GDP with an unacceptable deficit means higher taxes, lower growth, and weaker real wages in the future.
We must remember that Biden’s economic plan started with a full-blown recovery in place. This administration did not suffer the consequences of the COVID-19 lockdowns. By the time the Biden administration arrived, America was already creating almost 250,000 jobs a month.
Biden should have picked the fruits of a fast-recovering economy that is almost energy-independent and, therefore, should not have suffered the impact of the war on Ukraine while enjoying the tailwinds of the largest fiscal and monetary stimulus.
The multiplier effect of the chain of implemented government programs may have inflated GDP, but gross domestic income (GDI) presented a significantly different picture. The GDI revealed a stagnant economy with persistent inflation.
The government’s wasteful spending of newly printed money is adding gasoline to inflationary pressures, a result of careless fiscal policy and massive deficit spending. When the government prints more money than the private sector needs, inflation occurs, and the purchasing power of that money decreases.
The evidence from the past four years indicates that if the government had abandoned its spending and tax hike plans, the United States economy would have recovered better and with higher productivity growth. Despite the recovery, tax revenues fell short of expectations and spending rose to create what is now a completely unacceptable deficit.
Many economists argue that the economy is growing, and that inflation is a secondary problem. Not for the average American. Citizens are poorer in absolute and relative terms.
The consensus was wrong about the expected multiplier effect of government spending on growth and also about inflation because market participants decided to ignore monetary aggregates and the reality of unproductive spending.
Can the United States government boast this level of growth? One could argue that delivering $1.6 trillion of GDP with a $2 trillion increase in debt is not a success. This isn’t growing; it’s getting fatter. This negative situation has not improved since 2024. Every 100 days, the U.S. national debt rises by $1 trillion. Therefore, this means more taxes, less growth, and weaker real wages in the future. We can conclude that the United States’ public finances would be stronger and the economy would be more productive if the gigantic public spending packages and tax hikes had not been implemented.
The United States administration needs to focus more on the productive sector and less on increasing the size of the bureaucratic machine. Even if the rise in mandatory spending is offset by cuts in discretionary spending, it will still be difficult to reduce debt. Therefore, prioritizing is key. Taxes are already high enough, and there is plenty of evidence that shows how the recent increase in the tax wedge for businesses and families has made the economy weaker.
The government needs to understand that it is the cause of inflation. Only the government can make all prices rise in unison and continue to increase, and it achieves this by diluting the purchasing power of the currency and issuing more than demanded.
The next two quarters are going to be key to understanding the extent of the damage caused by reckless fiscal spending.
The US government has sabotaged the Federal Reserve’s modestly hawkish policy. The public deficit has added up to $2 trillion of newly created money per year, only to deliver less economic growth and cancel out the now insignificant $1.6 trillion decline in the Fed’s balance sheet. Whether there are rate hikes or not, the Fed cannot achieve price stability if the Treasury ignores all warning signs and adds more debt.
Since 2018, the United States has added roughly $7 trillion of GDP, while the government has increased debt by $12 trillion. Implementing fiscal stimulus by increasing expenditures and raising taxes is clearly ineffective.
Markets ignore the Fed’s hawkish messages because they see insane public debt and unsustainable deficit spending, and participants know that monetary destruction will resume regardless of persistent inflation.
There is plenty of time to correct the inflation and low growth problems. Only one measure will help: cutting spending. Everything else has failed.
EMERGENCY FINANCIAL NEWS: Economist Warns The Collapse Has Already Begun – Will Be Worse Than The Great Depression
Former Clinton Adviser Dr. Naomi Wolf Now Claims ‘It’s an Honor’ To Be Quoted By Infowars
Journalist Dr. Naomi Wolf, a former Clinton adviser, claimed she’s now “honored” to be quoted by Infowars when she previously would have “dreaded” it.
Wolf made the statement in response to a recent Infowars article covering her remarks at the Wellness Company’s Spike Symposium breaking down Pfizer’s attempts to cover up the adverse effects of its experimental COVID mRNA vaccines on fertility and newborns.
“At one time I would have dreaded being quoted in @infowars. Now I know it’s an honor,” Wolf posted on X Tuesday.
At one time I would have dreaded being quoted in @infowars. Now I know it’s an honor. https://t.co/mnwIkgfkEr
— Dr Naomi Wolf (@naomirwolf) May 6, 2024
Wolf, once a liberal journalist, has since changed her views in the wake of the COVID vaccine rollout and subsequent censoring of anyone who criticized the jab or COVID draconian measures.
Naomi Wolf was one of the most famous liberal intellectuals in America. Then she questioned lockdowns and the Covid vax. It’s pretty amazing what happened next. pic.twitter.com/zR0VJ9dwUO
— Tucker Carlson (@TuckerCarlson) April 11, 2024
She also clarified that she never would have voted for Joe Biden in 2020 had she known he wanted to impose new COVID lockdowns.
“If I’d known Biden was open to ‘lockdowns’ as he now states, which is something historically unprecedented in any pandemic, and a terrifying practice, one that won’t ever end because elites love it, I would never have voted for him,” Wolf tweeted.
If I’d known Biden was open to ‘lockdowns’ as he now states, which is something historically unprecedented in any pandemic, and a terrifying practice, one that won’t ever end because elites love it, I would never have voted for him.
— Dr Naomi Wolf (@naomirwolf) November 9, 2020
Wolf also apologized to conservatives last year for buying into the fake “January 6 insurrection” narrative.
Wolf was involved in President Bill Clinton’s 1996 reelection campaign as an adviser on how to reach more female voters, and also worked as a consultant for Al Gore’s 2000 presidential bid.
Wolf had her Twitter account suspended in 2021 after criticizing COVID lockdowns and the experimental jab, but it was reinstated in December 2022 after Elon Musk bought the platform and rebranded it as X.
Naomi Wolf joined The Alex Jones Show in 2022 to break down the establishment’s onslaught of deception over the safety and efficacy of the mRNA jabs:
The Antisemitism Bill Is Another NWO Trojan Horse
The Biden administration at the behest of encroaching World Government is ramming through the Antisemitism Bill which will in essence police all dissenting views against Israel, including Biblical Gospel text.
Also:
Watch: CNN Analyst Warns Jailing Trump Would be “Big Political Gift” for Him
A CNN analyst warned the network’s liberal viewers that while jailing Donald Trump may seem like a good idea in the short term, the stunt could ultimately backfire into a massive politicalvictory for the former president.
Discussing NY Judge Juan Merchan’s threats to jail Trump if he violates a gag order, CNN legal analyst Michael Moore commented that proceeding with the unprecedented act of jailing a US president could inadvertently hand Trump a “political gift.”
Putting himself in Merchan’s shoes, Moore posed hypothetical questions the judge may be weighing, asking, “How do I get Trump’s attention? How do I maintain the integrity and the respect of the court? How do I protect this process? How do I protect the trial? And at the same time, do I fall into the trap of giving Trump this big political gift of putting him in jail? Because the fact is he’d never be in jail in a place where any common person might serve any amount of time.”
Moore continued:
“I mean, he would be isolated, he would be put in a secure facility…He may never even see another inmate, it’s not like he’s going to have to shower in the shower room or use the toilet room with everybody else. That’s just not the way it would work. And so it would really be a gift, I think, for Trump. And that’s why he’s playing this card because he knows that the likelihood of him being incarcerated is slim to none, but the poor judge is sort of like the boy in the dike, he’s got his finger in the hole trying to stop the flood, but he can only do so much, the hole being Trump’s mouth.”
The sentiment that jailing Trump would increase his popularity appears to be gaining traction, as a plane flying over Manhattan Tuesday carried a banner reading, “WHEN U INDICT HIM YOU UNITE US. MAGA.”
Look what’s flying over NYC during the Trump Trial
— ShotGunBonnie (@ShotGun_Bonnie) May 7, 2024
A plane flying a banner that says “WHEN U INDICT HIM YOU UNITE US. MAGA.”#MAGA #Trump2024 pic.twitter.com/xak0ZqoM8A
Trump, meanwhile, has said he’d be willing to go to jail for violating an unconstitutional gag order.
“Frankly, you know what? Our Constitution is much more important than jail. It’s not even close. I’ll do that sacrifice any day, but what’s happening here is a disgrace,” Trump told reporters as he left the Manhattan courthouse Monday.