The US fiscal deficit is expected to reach 400 billion USD in 2005, a bit lower than the 425.5 billion USD in 2004. That coincides with its inflating current account deficit. The dual deficit has resulted from the excessive spending by the US government and residents and can hardly improve in a short time.

The Bush administration's expansionary fiscal policy, represented by an aggressive tax cuts program and swelling spending on the government and social provisions, has given a push start to the recovery of the US economy on one hand, but has brought more fiscal burden to the US on the other.

The generation born in the post-war "baby boom" will retire in the few years to come, which means sharp increase in bills for social security and healthcare. In addition, the US budget of 1.1 trillion USD for its military actions in Iraq, Afghanistan and other areas will make the situation worse. In this case, it is expectable that the US fiscal deficit will be pushed even higher if no special measures are taken in the future.

The US trade deficit has proved to be another no easy challenge. One-fifth of the US imports are oil and oil products which have no substitutes in the US. The country will have to pay more for their imports when the oil prices are still hovering high. And one-fourth of the US imports which are daily necessities are not produced in the US due to high costs. So import is the only choice even in the case of US dollar depreciation. And about one-fifth of the US imports deals are made among US multinational companies. This part of trade will not be reduced by a weaker US dollar.

The European Union and Japan, as two major trading partners of the US, are not able to develop a larger appetite for the US products because of their economic slowdown and slump in import demand. That has also unwittingly boost the exports of the rest of the world to the US, which in turn deteriorated the US trade deficit.

The US trade deficit with China, though still expanding, has not much to do with the RMB exchange rate. The US dollar, in terms of actual exchange rate, was down by nearly 20 percent between 2001 and 2004. That has added more US commodity trade deficit which soared to 662 billion USD in 2004, an increase of 237.9 billion USD from 2001. Given this, a 2 percent gain in RMB value will hardly have tangible effect on the Sino-US trade, nor will it reverse the swelling US trade deficit.

The US current account deficit is another consequence of the Fed's low interest rate. The low interest rate has dampened depositors but get consumers motivated. The US consumers are trapped in debts. On one hand, the US GDP per capita has exceeded 30,000 USD while on the other their personal deposit rates have kept declining. The individual deposit rate in the US stood at 4.6 percent in 1995, plunged to 1.8 percent in 2004, and then even went down to zero for some time in 2005.

The low interest rate has encouraged investment in durables like housing. Americans have outstanding credits of more than 2 trillion USD, which means that every household owes 79,000 USD on average. Non-performing loans are growing.

Adjustment on the exchange rate alone is not enough to solve the problem of dual deficit. If the US has the greenback depreciated sharply to reduce its current account deficit but does not boost deposits with a restrictive fiscal policy plus the interest rate hike, the depressive deposits will result in interest rate hike which will in turn buoy the dollar. Therefore, changes on the exchange rates alone will not work to erase the US international payment.

The US economy faces a structural imbalance between deposits and investment. The only solution to the dual deficit dilemma is effective interaction of fiscal, monetary, exchange rate and trade policies.

By People's Daily Online