1982: United States Discovers "Twin Deficits"

30 years ago, China did not yet represent 10 percent of the world’s commerce and was not the key supplier to the United States. Yet, still balanced in the first trimester of 1982, the United States’ current balance of payments went into a deficit that year and has remained that way ever since.

Indeed, since 1982, it only escaped deficit in 1991 for exceptional reasons linked to payments made by the Gulf monarchies in order to finance the first war on Iraq.

How should this situation be interpreted? One could reason that it is because of the slipping of the trade balance which is a component of the current balance of payments. This adds to the strictly commercial exchanges a flow of funds, related to the remuneration of foreign investments, tourism or the expatriation of a part of the population.

The trade balance of the United States has been in a deficit since 1971. That year, the deficit was $3 billion. In 2007, just before the financial crisis, it reached $795 billion, of which $350 billion was from the oil bill.

America, which was de-industrializing itself and could not limit its use of energy, became dependent on oil producers and Asian factories. So much so that Nicholas G. Mankiw, an economist who was the advisor to President George W. Bush, declared that the dollar’s exchange rate had become a domestic political issue in the United States, to the extent that it affected the lives of people differently.

The Different Social Classes No Longer Use the Same Currency

The different American social classes, who are becoming more and more dependent on imports, no longer use the same currency. The upper-middle class spends its holidays in Greece, drives German cars and wears Italian clothing, which they pay for in euros. In contrast, the working class shops at chains of stores where 80 percent of the products come from China; as a result they live off yuan…

However, this view of international economic relations is partial and even biased. Jacques Rueff, who advised de Gaulle in his fight against American monetary domination, wrote in one of his books analyzing the balance of payments that “the anthems for export are just stupidity and lies. They imply a lack of awareness of the futility of distinctions between international and domestic trade.”

Indeed, the economist sees in the current deficit a lack of savings and not a weakness in export. This is written as (S-I)+(T-G)=X-M, where S is savings, I is investment, T is taxes, G is government expenditure — and so T-G is the budget deficit and X-M is the deficit of the current balance of payments. America is in a deficit because it has forgotten how to save.

In fact, in 1982 “Reaganomics” was introduced, the neoconservative version of Keynesianism where activity and growth are sustained by a budget deficit nourished with low taxes, while leftist Keynesianism aims to grow public expenditure. That is how the logic of the “twin deficits” came about.

It is a fantasy twinning but contestable from a certain point of view, because it is more of a father-son relationship (the father being the budget deficit and the son being the external deficit). In 1982, the budget deficit spiraled out of control and reached 6 percent of gross domestic product (GDP). However, at the end of 1990 when the budget deficit was disappearing, a very accommodating monetary policy, which made saving less attractive and distributed consumer credit widely, maintained the external imbalance. America, the world’s largest economy, had become unable to save.

It must be said that there is no motivation to do so. The state has the habit of constantly lowering taxes regardless of the amount of public spending; the central bank is flooding the country with money without worrying about the consequences; frenetic American consumerism is spreading a growing number of dollars over the planet.

Indeed, the United States can afford not to save and live well above their means because they have what Jacques Rueff called an “exorbitant privilege,” that of beating global currency. The U.S. has an external deficit during surpluses in the rest of the world, especially in Asian countries.

Countries in surplus are accumulating dollars as well: In the cash registers of their central bank (China, perhaps Japan), Sovereign Wealth Funds (the oil monarchies) in their financial system (Germany). And what can they expect in return?

Formerly, they were entitled to receive gold, as, for example, De Gaulle did in the 1960s on the advice of Rueff. But since 1971 and Nixon’s decision to disconnect the dollar from gold, it has been disallowed, so they have put those dollars into the U.S. economy and expect in return the fruits of American labor. Quite stingy fruits when one sees the rate of return on investments in the United States!

Abysmal Deficit

It has thus been 30 years that America has been consuming without second thought, even claiming that it is doing a great service to the rest of humanity: If they were not there, who would buy the emerging market output and ensure spectacular growth? Luckily for global expansion, saving has ceased to be a concern in the United States!

But it was for a time. In 2008, the crisis shook the United States. The budget deficit reached $980 billion and the external deficit reached $710 billion. In 2009, the situation worsened, as the budget deficit reached $1.52 trillion. However, the deficit was reduced to $410 billion: the crisis alarmed private players and the widening deficit pushed them to recover their savings.

Certainly, in 2012, U.S. imports have continued to increase at a rate of 4 percent per year, but Rueff has told us that this does not make sense, as these imports are diverse. However, the budget deficit began its decline from 11.3 percent of GDP in 2009. As for the deficit of the current balance of payments, it decreased from 6 percent of GDP in 2006 to 3 percent today.

During the election campaign, Mitt Romney has denounced monetary facility and imbalances related to the U.S. external deficit to the point of suggesting the need to return to gold. America is starting to worry about all those dollars circulating in the world, and to reflect on the euro’s increasing share despite its vicissitudes in the global monetary reserves. Perhaps a new page will turn, one of unbridled American recklessness.

However, this does not lead us to believe that past excesses will eventually lead to the end of the exorbitant privilege of the dollar.