US: When do twin deficits matter? - AmpGFX

A key risk for the longer term outlook for the US economy is a growing fiscal deficit and wider current account deficit, suggests Greg Gibbs, Analyst at Amplifying Global FX Capital.

Key Quotes

“We contend that the market should defer its concern over these big-picture fundamentals to a time when it seems US rates and yields have peaked.  And there is a clearer understanding of how the tax cuts, deregulation and trade policy have combined to influence growth and potential output in the USA.”

“If the deficit becomes a problem, it is likely to first present itself via inflationary pressure and higher US yields.  However, if inflation more clearly moves ahead of the Fed’s target, the Fed is likely to raise real rates to slow domestic demand.  In this instance, the USD may rise until rates appear to slow demand.”

“At some point the USA may find itself with large twin deficits, slowing economic momentum and peaking yields.  At that time, perhaps from a position of a more expensive USD, we should start to fret about twin deficits and the need for fiscal consolidation even as the economy is peaking.”

“At this stage of the game, it seems too early to be worrying deeply about a risk premium related to twin deficits driving down the USD.”