Tariffs: The $’s elephant in the room
Trump’s tariffs will backfire spectacularly. It might not resolve the trade deficit, driving up prices. MAGA? Certainly not — it will undermine the dollar instead
The twin deficit syndrome
Unless there is an increase in personal savings, a budget deficit feeds into a trade deficit. The mechanism is simple to explain.
A budget deficit results in an injection of extra credit into the economy, mostly in the form of direct (welfare) and indirect (wages and other subsidies) support for consumer spending. This is in addition to the wages and other income consumers enjoy from their own activities. And unless consumers increase their savings to allow for the extra government credit over and above its revenue income, it will be spent on consumption.
We must now refer to Say’s law. Jean-Baptiste Say was an early French economist who understood that through our division of labour we produce goods and services to consume. In other words, we use our individual skills to maximise our income, so that we can buy the things we need and choose. And because everyone else does the same, we all have access to goods and services which it would be silly for us to produce ourselves.
The relevance to twin deficits is simple. Because we all produce to consume, without
