 Welcome. In the economics news, you have heard certainly many times about the dilemma that policy authorities have in balancing their books. Debates about the fiscal deficit is are ongoing, have always been there, not just in the U.S. but also in other countries. Lots of pressure on the government to balance the budget, but also pressure on the government to stimulate the economy through expenditures, to stimulate the economy through cutting taxes, but the risk is that in the short run at least there is a risk that if expenditures are increasing faster than the revenue, of course the deficit is going to expand. Also if the government chooses to simulate economic activity by cutting taxes, in the short run you may have a reduction in tax revenue, which also happens for example when countries embark on trade liberalization by removing or reducing tariffs, that reduces the revenue. It then may increase the deficit. What we have seen in historically is that there is a linkage between the two deficits which governments face, which is the budget deficit and the current account deficit or trade deficit. And those tend to move together. Countries that are facing large current account deficits typically also are facing large fiscal deficits. That's why they are referred to in the literature as twin deficits, as if they were born at the same time. And there is a linkage going from one to the other and vice versa. So when you look at the U.S. for example, it's facing a substantial current account deficit. In 2010 it was about negative 3.2 percent of GDP. That's quite a substantial deficit. Whereas say for China, it's the other way around they are facing a current account surplus, which means that they are exporting more than they are importing, they get descending to the rest of the world more than they are receiving in terms of exports. That has been typically the case over the several years. I was looking at in the year 2000 for the U.S. the current account deficit was about 4.2 percent negative. For China it was about 1.7 percent positive. At the same time in 2010 the U.S. faces a substantial fiscal deficit. If you look at what is called the net lending position it was about negative 10 percent, which means that the U.S. is spending more than the U.S. government is spending more than it is receiving. So it's interesting to then think about what would be the channels through which the two deficits are related. Why is it that they tend to move in the same direction? So that if you're looking at a chart that looks at the trend of current account deficit and budget deficit you will see that they move in the same direction. So if you have a government that's running a budget deficit that means that the government is in need of borrowing to finance the deficit. So the government will have to issue bonds to finance the deficit because there is a limitation to how much they can actually monetize the deficit which means print money to finance the deficit which technically means borrowing from the central bank. So if since the government will have to borrow that means that as the budget deficit increases as the need for the government extra financing for the government increases that means that the public that's going to finance the deficit is going to require higher interest from the government. If the government wants me to pay to give them money to finance the deficit the more money they want I'm going to ask for a higher interest rate. So what you'll see is that as the deficit increases as the budget deficit increases if we say for for the US as the deficit increases then that is going to be accompanied by an increase in the interest rate. So the government it becomes more expensive for the government to to borrow as the deficit increases and we'll talk about what happens if in fact that goes out of control if the deficit increases rises really really high as we as we would see we as we have been seeing in Europe European countries Greece and that Italy is also facing serious problems that can degenerate to serious sovereign debt crisis. So once the as the deficit increases the the interest rate goes up because the government has to pay a higher interest rate but as the interest rate goes up what you'll see is that the exchange rate of the dollar is going to appreciate so appreciation. So relative to the rest of the world because of the demand for US dollars as the the the interest rate increases. But then what happens when the exchange rate appreciates as the exchange rate appreciates that means that two things are going to happen one is that US exports becomes more expensive for foreign buyers whereas foreign goods become cheaper for US consumers for foreign consumers which means that you you will end up seeing that exports US exports will go down and imports will tend to rise and this is what is going to to create the trade deficit. So you'll see that a budget deficit is going to eventually link to lead to a trade deficit and that's why when you look at the data we tend to see that in periods where the deficit budget deficit was rising we also see the trade deficit rising. Now of course there are limits to how much the deficit the deficit will the budget deficit can increase without being detrimental to the economy debilitating to economic activity. What you have seen in the case of what that led to the to the european debt crisis was a situation where debt was become had become unsustainable and the government basically were facing the risk of bankruptcy just like firms enterprises or households excessive borrowing leads to leads to insolvency where a government is unable to service the debt and the and the came they come to a situation where even promises of higher interest rates does not attract investors enough to be able to buy investors are not interested in buying government securities because they see them as risk so the risk is too high. So that's that's one of the of the of the limitations that governments cannot infinitely indefinitely continue to borrow to finance a rising deficit that's one. The other limitation is that as I said before faced with the deficit the governments have options of borrowing but they also have options of monetary monetizing the deficit which is using senior age or borrowing from the central bank to to finance the deficit. The problem is that in countries say in that are members of monetary unions for example for for Greece they have no control of a monetary policy because that's controlled by the central bank of the zone the european central bank so that takes away already one of the policy tools that countries that governments have in in managing fiscal policy and and monetary monetary policy which means that while currency unions have very substantial advantages they come with constraints in terms of limitation in the policy toolkit that countries can use. So that is a dilemma and I'm sure when you if you have been following the news on the debt european debt crisis especially last year there was there was talk a lot of talk about the threat to the european union the the european the the common currency the eurozone but I think things are still not settled but there is no no I don't think there's a threat to the zone breaking up or anything but that shows you that while there may be advantages to currency union in terms of easier movements of goods and services easier movement of human capital also there are there are constraints there are other regions even including in developing countries in Africa for example that have common currency areas at some sub-regional groupings are moving towards there so it's it's a long process but because governments understand about that there are advantages but there are also also costs so this was mostly about trying to see how we can explain the fact that over time we have seen budget deficits and trade deficits moving together it has to do with the financing of the deficit implications on interest rate and implications on exchange rate which have which drive exports and import resulting in a trade deficit or surpluses thank you