The U.S. has been experiencing a current account deficit (external imbalance) and a growing budget deficit (internal imbalance). There are concerns that the internal imbalance is getting out of control. One way to resolve the imbalance is the address social security and medicare costs. Policy makers in the Obama Administration are advocating of bending the health care cost and keeping the growth of health care in line with economic growth.
Another is the current account deficit which is reducing our GDP growth. It is estimated the trade deficit reduces 5-8 percent of the $14 trillion GDP. It ranges between $500-$800 billion annually.
Addressing the low growth of the current economic situation, the federal reserve embarking on a monetary expansion policy of quantitative easing and a low fed funds rate. It has expanded various loan facilities. On the fiscal side of the equation, Keynesian style economic policy is en vogue with massive stimulus plan.
Fighting unemployment with a monetary and fiscal expansionary policies is the proper course of action except that it is inconsistent a current account deficit. The correct policy is a tightening fiscal and monetary policies to address the current account deficit. The inconsistent policy is tolerable in the short run, however, something has to give in the long run.
Exchange rate of the US dollar has to give. In this case, it has to be devalued in terms of another currency.
So, expect a lot of discussion in Congress this fall about the revaluation of the Chinese RMB to address the internal and external balances of the U.S. economy.
