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debating global imbalances « Previous | |Next »
April 20, 2005

Finally, there is some commentary on international global economics in the Australian press. In an editorial in yesterday's AFR it was stated that:

Once again, the global economy is traversing risky terrain, in large part due to the failure of policy makers to redress economic imbalances....Only last weekend the G7 issued another communique urging member nations to vigorously pursue economic reform. The requirements are well known: the US to tackle its budget deficit, Europe and Japan to breathe new life into their moribund domestic economies; Asia to boost domestic demand and free up exchange rates. Once again the call to reform may fall on deaf ears. If so, it leaves the risk of a destablising correction in the US dollar, increases in US interest rates and slowing global growth.

There is nothing about the US needing to reduce its current account deficit. Does this mean that reducing the fiscal deficit will tend to reduce US domestic demand growth and that will, in turn, will bring the trade deficit down.

We find a similar line here:-the argument that it is China's fault as it needs to revalue its currency. The US Treasury line is being recycled with little critical awareness. Does this signify the view that the US current account deficit does not matter? Or is the deficit a sign of strength, not a potential weakness? The implication is that there is no need for precise commitments from the US to reduce the deficit.

Is this the case? Are there alternative approaches?

In an op.ed. in the AFR Malcolm Cook and Mark Thiriwell say that:

The US is increasingly reliant on Asia to fund large external deficits which in turn leaves Asia increasingly exposed to any adverse dollar movements. One result of this codependent relationship has been that the central banks of China, Taiwan, South Korea and India are the world's largest holders of foreign exhange reserves. This leaves Asia as a key player in determining the value of the dollar and hence the stability of global monetary conditions.

So how do we address the global imbalances? Cook and Thiriwell do not say.

An alternative approach is the symmetric adjustment.Brad Setser says that this involves:

adjustment by both the surplus country (China) and the deficit country (the US), rather than adjustment by just the surplus country or just the deficit county. Adjustment by the surplus country alone -- a Chinese revaluation without any change in US policy to reduce its need to borrow savings from the world -- risks leading to large rises in US interest rates, as China would have less savings to lend to the US, while the US need for savings would remain unchanged. Adjustment by the deficit country alone -- a US fiscal retrenchment without any offsetting changes in the rest of the world -- risks leading to a contraction in global demand and slower global growth. That would slow US export growth: the trade deficit would fall, but because of falling imports, not rising exports …

| Posted by Gary Sauer-Thompson at 11:12 AM | | Comments (0)