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global economic imbalances « Previous | |Next »
April 18, 2005

The IMF is concerned about global imbalances. The G7 communique says that vigororous action is needed to address global imbalances. A correction coming up if the problem is ignored. What are they talking about?

Stephen Roach puts it simply and well:

"There seems to be no end in sight to the widening of America’s gaping external imbalance. A record $61 billion trade deficit for February is only the latest in a long string of warning signs for an unbalanced US and global economy. The rebalancing required to temper these deficits requires significant adjustments in macro policies. Yet with America’s fiscal and monetary authorities basically frozen at the switch, politicians are asserting greater control over the adjustment process — firing one protectionist salvo after another. The tradeoff between policy adjustments and political actions lies at the heart of the sustainability debate for ever-mounting global imbalances. A tipping point could be close at hand. There’s really no other way to put it — the latest trade numbers in the US were simply terrible."

Brad Setser thinks that the US external trade imbalance will be worse in March, as there is no evidence of a slowdown in US imports. General Glut says that the key concern is the stagnant US export performance of late. Will the gap between import growth and export growth continue to widen? The disturbing point is that the U.S. trade deficit continues to widen, despite dollar depreciation.

As gloom settles around Wall Street over the stockmarket fallout, investors panic, and fears about it getting ugly circulate on finance street, the policy response by Congress to the US deficits is to remain firmly within its protectionist tradition.

The global economic situation is one in which the world’s leading economic power is running chronic trade deficits and is the world's largest foreign debtor. The US economy is living dangerously beyond its means and fiscal and monetary discipline is needed to avoid a big debt/dollar crisis. What Roach calls tough love.

This situation stands in sharp contrast with the experience in the first "golden era" of globalization in the years leading up to World War I. In that earlier period, trade was the engine of economic development as assets were shifted from colonial powers to their newly settled colonies. Today, it is the surpluses in the Asian developing world that is funding the chronic deficits in the US through the mechanism of capital inflows.

A sign of the shift in global economic power is this piece of news in the Washington Post:

"The Bush administration yesterday stepped up its appeals for China to let its currency rise, as pressure mounted in Congress for tougher action on a host of Chinese practices that allegedly fuel the burgeoning U.S. trade deficit."

Note "appeals". The US cannot kick butt. It does not have the power to do so. And the G7 talks in terms of coaxing.

Of course, what the US should really be doing is getting its own house in order. Yet there is very little evidence of that. As Brad Setser says "America’s fiscal and monetary authorities [are] basically frozen at the switch." That is political paralysis in the face of growing debt problems isn't it?

That means a correction is coming up, doesn't it.

| Posted by Gary Sauer-Thompson at 9:14 AM | | Comments (0)