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“GLOBAL IMBALANCES AFTER THE
ECONOMIC CRISIS”
Dimitri B. Papadimitriou
Levy Economics Institute
International Development Economics Associates (IDEAs) Conference
“Reforming the Financial System: Proposals, Constraints and New
Directions”
January 25-27, 2010, Muttukadu, Chennai, India
Outline
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Global imbalances and the crisis
Origins of the U.S. external deficit
The role of China and oil exporters
Plausible future scenarios
Measures to address global imbalances
The “savings glut” hypothesis
“I will argue that over the past decade a combination of
diverse forces has created a significant increase in the
global supply of saving - a global saving glut - which
helps to explain both the increase in the U.S. current
account deficit and the relatively low level of long-term
real interest rates in the world today.
(…) the developing and emerging-market countries that
brought their current accounts into surplus did so to
reduce their foreign debts, stabilize their currencies, and
reduce the risk of financial crisis
(..) Because investment by businesses in equipment and
structures has been relatively low in recent years (…)
much of the recent capital inflow into the developed
world has shown up in higher rates of home construction
and in higher home prices. Higher home prices in turn
have encouraged households to increase their
consumption” Bernanke (2005)
Chinese External Sector
Chinese International Reserves
Current Account Behavior for Oil
Exporters
Key Global Current Account Balances
U.S. Net Foreign Assets and Current
Account Balance
Foreigners’ Role in Financing U.S.
Government Deficit
Foreign Holdings of U.S. Treasury
Securities
Japan
China
Germany
Oil
exporters
U.K.
Financial
centers
Dec. 2000
31.3%
5.9%
4.8%
4.7%
4.9%
8.2%
Dec. 2006
29.6%
18.9%
2.2%
5.2%
4.4%
7.9%
Aug. 2009
21.2%
23.1%
1.6%
5.5%
6.5%
9.9%
Source: Dep. of the Treasury
Financial centers: Caribbean Banking Centers, Luxembourg, Switzerland
The Conceptual Framework
Accounting Identity of Financial Balances
Internal
Financial Balance
=
Current
Account
Balance
{
+
Government
Balance
{
Private
Sector
Balance
External
Financial Balance
In 2008 the identity was roughly like this:
1.1% of GDP -6.0% of GDP = -4.9% of GDP
Third quarter 2009 the identity was roughly like this:
7.9% of GDP –10.9% of GDP = -3.0% of GDP
U.S. Main Sector Balances and Real GDP
Growth
Private Sector Borrowing: Historical Data
and Baseline Assumptions
Congressional Budget Office Projections
for the Federal Budget
Main Sector Balances in Baseline
Scenario
U.S. Exports by Country of Destination
Main Sector Balances in Scenario 1,
Postponed Deficit Reduction
U.S. Dollar Exchange Rate (Broad
Index) Actual and Projected
Main Sector and Trade Balances in
Scenario 2, U.S. Dollar Devaluation and
Some Deficit Reduction
Global Rebalancing is Necessary
Private Consumption as a Share of GDP
Policies to correct imbalances
• Revaluation of the currencies of surplus
countries will be effective in reducing both
global and U.S. domestic imbalances
• Such revaluation will require concerted
actions of Central banks, particularly in East
Asia
• Energy policies can reduce the impact of oil
price changes on the U.S. trade balance, and
the U.S. oil trade deficit
If these fail then . . .
“Unpopular” Policies may become
necessary
Under WTO rules (Article 12), external imbalances
can be addressed through “protectionist-type”
measures
- non-selective import tariffs
- import certificates (Buffet proposal)
- import certificates (Levy Institute version)
The more effective resolution can probably be
achieved only via an international agreement that
would change the international pattern of
aggregate demand, combined with a change in
relative prices. Together, these measures would
ensure that trade is generally balanced at full
employment.
Thank You