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Could the twin deficits jeopardize US hegemony?

Frankel J ...see all

Journal of Policy Modeling, vol. 28, issue 6 (2006) pp. 653-663

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The American twin deficits are back. One obvious cost is a possible hard landing. A less obvious possibility is that imperial overstretch could eventually cost the US its global hegemony. This paper addresses many challenges to the twin deficits view that have been offered: the Starve the Beast rationale for the budget deficit, the straw-man question of whether the budget and current account deficits are always twins, the wishful thinking that the US has an investment boom, the correct point that private saving is low as well as public saving, the claim of a global savings glut, the observation that global financial markets are big, the hope that valuation effects or unmeasured services as world banker will allow Americans to continue the exorbitant privilege of consuming at others' expense indefinitely, and the proposition that China will happily buy dollars indefinitely. When all novel viewpoints are considered, one is still left with the reality of an unsustainable path of high budget deficits, low national saving, and high current account deficits. © 2006 Society for Policy Modeling.

Author-supplied keywords

  • Dollar depreciation
  • International monetary system
  • Sustainability of US current account
  • US economic hegemony

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  • Jeffrey Frankel

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