The Consequences of Budget Deficits for International Trade

by Alasdair MacLeod
Gold Money

In all the economic mayhem ahead, no one is yet thinking of the consequences for trade imbalances. The twin deficit hypothesis informs us that skyrocketing US budget deficits will lead to increasing trade deficits, a situation with serious political consequences. Furthermore, with foreign interests already saturated with dollars and financial assets denominated in them, far from investing their growing surpluses in yet more dollars and dollar-denominated investments, they will become increasingly aggressive sellers.

This article walks the reader through the main issues of international trade in a developing slump and finds worrying parallels with the Wall Street crash and subsequent events. While the parallels are worrying, the major differences between then and now suggest that this time outcomes could be even more economically challenging.

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