The deficits are both growing, but they are not twins. One is much larger than the other.
New figures on the US budget and trade deficits this week showed that it is the trade deficit that is plunging to unprecedented depths, while the budget deficit is large but smaller than it was a year ago.
Expressed as a percentage of GDP, the trade deficit for the 12 months through October hit 6.1 percent. Only three years ago it was 4 percent, a figure that then seemed huge and unsustainable.
The report on the budget deficit for last month showed that it is growing again, but as a percentage of GDP it is just 2.7 percent. That is a smaller figure than is being posted by a number of major European countries, and it is well below where it was a year or two ago.
That improvement is caused entirely by the strong economy, which has raised tax revenues, particularly from income taxes. Government spending is now the highest it has been since 1997, when expressed as a percentage of the total economy.
The term "twin deficits" was invented in the 1980s during former US president Ronald Reagan's administration, as both deficits soared. The Reagan budget deficits remain far larger than anything produced so far by US President George W. Bush. They peaked, on a rolling 12-month basis, at 5.8 percent of GDP, more than twice the current level.
But the trade deficit is much larger than it ever was during the Reagan administration. There was much hand-wringing then as the trade deficit approached 3 percent of GDP -- half the current level -- and governments of the major industrialized countries engineered the Plaza Accord, which brought down the dollar and, in time, the trade deficit.
This year, the US dollar has surprised nearly everyone with its strength against the major industrialized countries, and what may be the most important exchange rate of all, the dollar versus the Chinese yuan, has been allowed by the Chinese government to adjust only a small amount.
Notwithstanding talk about the decline of the US' manufacturing strength, the level of exports has remained relatively high.
In recent decades, exports as a proportion of GDP have fluctuated from 5 percent to 8 percent.
The latest 12-month figure, 7.2 percent, is closer to the top than the bottom of that range.
But what has changed is the value of imports. During the Reagan years, they never hit 9 percent of GDP.
Currently they are above 13 percent. It is hard to see how the trade deficit will improve without a fall in imports, something that is most likely during a consumer recession.
Soaring oil prices have played a significant role in the expanding trade deficit, but they are far from the whole story. Crude oil and petroleum products account for little more than a quarter of the trade deficit, which would be setting records even if the oil trade were in balance.
How big can the trade deficit get? So long as Americans are willing to borrow and buy, and so long as foreigners are willing to lend the dollars back to Americans, it is risky indeed to say that the deficit cannot continue to grow.
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