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He states that changes international capital flows have been the primary consequence of increased deficits and likens this to direct competition between the U.S. Treasury and the U.S. exporting industry. He reasons that the flow of foreign funds into the Treasury prevents these funds from being available for foreign purchase of U.S. goods and services. Thus, the more our government borrows and finances with foreign funds, the more our export market will continue to deteriorate.
Frankel (2004) believes the twin deficits situation will bring about a hard landing that could materialize in any number of ways. If the U.S. is forced to start paying back foreign investors, growth will significantly slow and there is a danger of resurgence in protectionism. Frankel sees even more peril than Garrison's gloomy domestic implications. Frankel (2004) believes there will be a decline in the dollar that will result in a possible loss of United States economic hegemony and will create new rivals to the dollar such as the Euro.
In summary, twin deficits are not to be taken lightly. Soon, the patience of foreign borrowers may run...
At the least, the government will continue to hawk its debt, but our companies will have a harder time selling their goods and will become even less competitive in the global economy. Thus, either scenario, foreign investors either stop or continue lending, represents a painful conclusion for the twin deficits.
Bibliography
Cooper, R, 2005 (November). Living with global imbalances: A contrarian view. Policy Briefs in International Economics, no. PB05-3, Institute for International Economics.
Frankel, J. (2004). Twin deficits and twin decades. Federal Reserve Bank of Boston conference. In The Macroeconomics of Fiscal Policy, edited by Kopcke, R., Tootell, G. And Triest, R. Cambridge, MA: MIT Press, 2006), pp. 321-335.
Garrison, R.W., (2003, April). The trouble with deficit finance. The Free Market Vol 21, No 4. http://mises.org/freemarket_detail.aspx?control=435
The Economist: Danger time for America (2006, January 12). http://neweconomist.blogs.com/new_economist/2006/01/economist_dange.html
Bibliography
Cooper, R, 2005 (November). Living with global imbalances: A contrarian view. Policy Briefs in International Economics, no. PB05-3, Institute for International Economics.
Frankel, J. (2004). Twin deficits and twin decades. Federal Reserve Bank of Boston conference. In The Macroeconomics of Fiscal Policy, edited by Kopcke, R., Tootell, G. And Triest, R. Cambridge, MA: MIT Press, 2006), pp. 321-335.
Garrison, R.W., (2003, April). The trouble with deficit finance. The Free Market Vol 21, No 4. http://mises.org/freemarket_detail.aspx?control=435
The Economist: Danger time for America (2006, January 12). http://neweconomist.blogs.com/new_economist/2006/01/economist_dange.html
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