by Giuseppe Timpone

Created on: December 12, 2008

I think the actual U.S. financial crisis is consequence of a wrong economic belief, in the US politics and business world, according to which the Fed and the government should "support" the national economy, by keeping interest ratex low and encouraging credits and private consumption. This paradox of a free-market country, behaving as a keynesian policy-maker, is reflected into the U.S. trade deficit problem. The question is: Why has been being the U.S. trade deficits so high for the latest 7-8 years?

The cause is unfortunately always the same: wrong monetary, fiscal and currency policies. The economists sometimes use an expression, which sounds like that: "twin deficits". What is that?

Let's explain this concept: When a government spends more than its tax revenues, as a consequence a fiscal deficit is created, which is, therefore, the difference between spendings and revenues. From a macroeconomical point of view, that means that the citizens of this country are overconsuming, as the total national demand is growing; otherwise said, people are buying too much. Of course, in an open economy, that means that people are importing (buying) more from abroad, causing a trade deficit (imports are more than exports; notice, exports don't depend on the national income, but on the rest of the world's income, so being 'exogenous').

As we can see, a fiscal defict causes a trade deficit, that's they are walking together, as they were 'twins'. That's why they are called 'twin deficits'! There wouldn't be any serious problem, if the economy would be let work alone. But what in the U.S. has been happening, in the latest years, is that what you consider the most liberist U.S. administration of the latest decades, has been, in the reality, the most interventionist. I'll try to explain: the Bush administration has kept the interest rates low, in these years, in order to stimulate economy and employment. This policy doesn't allow the economy to reach an equilibrium point, and associating this with a deficit spending policy, one creates the conditions for a national economic and financial disaster. By keeping interest rates so low, people will go on overc-onsuming, making the spontaneous equilibrium impossible; in fact, let alone, the economy would force interest rates rise, and the individuals would consume less and save more, letting the trade deficit vanish. Not only: low interest rates cause inflation, and this harms the national exports; if the U.S. inflation rate is higher

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