The United States and the Twin Deficit

A 40 – year experiment in financial power, social neglect and geopolitical projection

The twin deficits and Triffin’s Dilemma

The US has been running a structural current account deficit for decades. It has also run a structural budget deficit for decades. The two together form the Twin Deficits – the defining pattern behind US economic power since the 1980s.

How is the Twin Deficit defined in economic terms?  

Current Account Balance (NX)=(Private Savings−Investment)+(Government Revenue−Government Spending),  or in short:

·       NX = (S – I) + (T – G)

with S = Private Savings, I = Investment, T = Government Revenue, G = Government Spending

And in this equation, there is the Twin Deficits (in case of the US):

• (T – G) < 0 → Government budget deficit
• (S – I) < 0 → Private sector net borrowing (i.e., negative financial balance)
• ➜ NX < 0 → Current account deficit → must be financed by capital inflows

It is an economic equation and hence, both sides of the equation have to balance. In the US case, you have a current account deficit (NX < 0) on the right-hand side. Correspondingly, the left hand side has to be negative as well, or in simple math: ((T-G) + (S-I) < 0), giving rise to the twin - deficit.

·       NX < 0 and ((T-G)+(S-I) form the twin deficit

·       And this twin deficit, needs to be funded by capital inflows

So, in essence, since the 1980 – when the fiat USD rose to the status of reserve currency, the US had a government deficit and simultaneously  insufficient savings (e.g. private savings < than private investment).

This is just an equation – but these days, people give moral meaning to it or try to interpret it in work ethics vs. consumer ethics etc. You are hearing sentences like: “The rest of the world RoW are taking our jobs”. The RoW respond: “We are financing your consumer extravagances”. Unfortunately, as so often in economics, both are right. But let’s dig a bit deeper into that to disentangle spaghetti – ethics.

How the Triffin Dilemma has calcified and became structural

In 1960, the French economist Triffin forecasted that the post war fixed exchange rate regime, in which the USD was pegged to Gold, would eventually collapse. Why? Because, in order to equip the rest of the world with the new reserve currency, the US would have to run constant current account deficits.  

The ability to run current account deficits without currency depreciation, e.g. to consume more than you produce and finance this just by minting or printing your own money is an extraordinary privilege.  However, Triffin feared that constant and significant current account deficits would undermine the credibility of the reserve currency. And as there is no reserve currency without credibility, he feared that the USD or at least the peg against Gold would eventually collapse.

Triffin, was right. While the international lust for a reserve currency grew, the USD lost credibility and people (more governments) eventually begun converting the USD against Gold. Nixon was forced to surrender and let the USD float freely against other currencies again.

However, neither was this the end for the insatiable demand for international liquidity nor was not the end of the Triffin Dilemma. It morphed. In the 1980s, the USD made a roaring comeback – this time freed from the shackles of a Gold peg and ready to match more or less unlimited demand for international currency with (more or less) unlimited supply. A pre-condition for the supply being the re-emergence of the twin deficits. However, this time the dilemma manifested itself deeper in the American economy and in the US society and became a structural, some might argue a toxic feature of US realities.

How the extraordinary privilege failed the American people: The Cantillon Logic of Deficits

It is true, that the reserve currency status produces an extraordinary privilege. However, this privilege was never a privilege of the ordinary people. It was – to a large extend - a privilege of the US - government, of the banks, asset managers and hedge funds distributing and managing the new reserve currency in correspondence with the FED and global businesses using it as a means of exchange and a store of value.

This, in a nutshell is based on the ideas of a French economist, Richard Cantillon (ca. 1680–1734). When new money is created, it doesn't enter the economy evenly. It flows through specific channels — and those who receive it first benefit the most. In a system with chronic current account deficits, the state often becomes the main issuer of financial claims (Treasuries, subsidies, liquidity). If these claims are absorbed by financial intermediaries, foreign governments, hedge funds and not households, the distribution becomes increasingly asymmetric.

And in the case of the United States, the government did not use its twin deficits to build domestic resilience. It used them to build an empire. The fiscal space created by dollar hegemony didn’t go into industrial renewal or social cohesion. It went into defence, global security, safety of trading rails and geopolitical projection.

Between an Empire or a Republic?

While the US ran persistent deficits and exported dollars to the world, it failed to build domestic resilience, distribute or generate growth more evenly. Consequently, it invested less than most OECD / EUR countries in social infrastructure, has lower private savings and a more skewed wealth / income distribution than most other countries.  

The US exported dollars and imported inequality. This is not a bug, it is a design.

America didn’t mismanage its deficits. It weaponized them:

  Not to strengthen its middle class,

  But to maintain global dominance.

  Not to upgrade domestic capacity,

  But to outsource production and subsidize consumption.

Empire was funded. But society was not.

Empires build global stability, Republics build domestic and social resilience.

So, the US seems at the cross-road: Follow the lead of the globalists or going back to the roots and take orientation from the Founding Fathers?

And this is, where Trump’s “333+2” doctrine is a political attempt to re-anchor the American model:

·       3% growth

·       3% 10-year yield

·       3% Budget Deficit

·       ~2% inflation

It sounds technocratic. But it’s fundamentally political. It’s a Reaganite remix. With a focus on fly-over people.