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addressing global imbalances « Previous | |Next »
October 17, 2005

Stephen Grenville, a visiting fellow at the Lowy Institute, addresses the issue of global imbalances in this article, which was published in the Australian Financial Review's Review section on Friday.

Grenville is more concerned about global economic imbalances than the Reserve Bank of Australia and, unlike the RBA, he is willing to acknowledge that the current global imbalances may not be sustainable. The RBA appears to have convinced itself that the current situation is sustainable.

Grenville begins by saying:

The IMF's latest World Economic Outlook has triggered another round of concern about large international payments imbalances, with a special focus on the sustainability of the US current account deficit, now at 6 per cent of national income and growing inexorably. What, if anything, should be done?....There are various possible triggers for adjustment, but two examples will suffice: a change in US saving; and a change in the funding of the US external deficit.

Grenville says that the former issue---the US budget deficit---could be addresed, if the US reformed its prodigal ways and saved more. This is constrained by 'a low-taxing president and civic reconstruction now added to the demands of the Iraq war' and hence 'large budget deficits are likely to remain.'

However, the other unusual element of the US savings performance, 'the households which have in recent years decided to save nothing, and to fund their consumption from "equity extraction" (borrowing against the newly inflated prices of their homes)' can be addressed. Grenville says that 'even US Federal Reserve chairman Alan Greenspan, who is usually ready to let the market sort things out, is now worrying about the extent of this borrowing'.

Though household consumption needs to be tightened---to reduce the housing price bubble--this is not enough to cause a smaller US current account deficit. That requires either an increase in world demand for US exports and/or a cut in US imports.

Is that on the cards? The two mechanisms are increased US international competitiveness (from a lower dollar or higher productivity) and increased protectionism driven by US Congress beholden to the lobby pressures from an uncompetitive US industry. Here at public opinion we give greater weight to the protectionism mechanism under the current Bush administration. The Bushies have a preference for the bad option.

Grenville says that the US's current account deficit is currently being financed by 'the lenders of last resort, the central banks of China and Japan, which are now funding 60 per cent of the US deficit by buying low-interest US government securities.' He adds that:

In doing this, they are in a real bind. Neither country wants to see its exchange rate appreciate much. But investing in low-return securities denominated in a currency which is likely to go down (perhaps sharply) doesn't seem all that rational. The penalty may be high — a 20 per cent change in the yuan-dollar parity would give China a loss on its reserves of close to 10 per cent of GDP. This would be a huge blow to the balance sheet of the central bank, as holder of the reserves. Restructuring reserves to reduce the weight of the dollar is tricky: the Chinese have only the yen and the euro to choose from. For Japan the choice of reserve currency is more limited still. In short, while China and Japan will be reluctant to run down their US reserves, it may not be sustainable for them to go on building ever-larger reserves, and their search among the unpalatable alternatives would remove one of the supports of the present situation.

The adjustments mechanisms here are those of the market itself, which works in a slow, jerky, convoluted and drawn out; or encouraging more private capital flows to the US or to non-Chinese Asia or the revival of productive investment in Japan and Germany.

These kind of adjustments are certainly preferrable the current US policy of blaming China but how likely are they? The US has blocked private capital infliows from China as it finds Chinese ownership of its companies unpalatable.

| Posted by Gary Sauer-Thompson at 9:11 AM | | Comments (3)


Yeh the US-China/Japan movement of money is becoming a negative feedback loop that is moving tot he point of impossible extraction of either side. The US is dependent on cheap credit to keep its consumer based economy chugging, while Japan/China practice Japanese style Asian capitalism and are dependent on an export driven economy to keep their nation-states manufacturing.

As Marvin said, "It will all end in tears". The question is when, and what change the Asian style of capitalism will have to change to. They are going to have to become consumer based like the western economies if they want resilient growth.

The US, as the world's largest consumer economy, is also putting the globe on the brink too with its deficit spending. The deficits might not have have political consequences, but they do have economic consequences. And the drunken sailors at the helm of the US economy have shown nothing but incompetence and self-interest in paying off their special interests.

It doesnt help that Wall Street is lieing to itself about inflation and the drop in real wages, both which normally precipitate a recession. Analysts on Wall Street cut out housing, energy and food to create a "core inflation", which basically means all the non-inflationary bits. Idiots.


It is suprising that the Reserve Bank of Australia is so complacent about these global imbalances. This puzzles me. It is as if they think that market forces will resolve these issues in a benign manner, and so there is no need for international governance to address the emablances.

They seem to assume that equilibrium is the natural state of the global financial market not disequilibrium--despite the wrecking ball evidence of the Asian financial crisis in the late 1990s. The 'rebalances' will just happen.

I'm not so sure. The US current account deficit means that it has a deficit on imports over exports because the international competitiveness of its industry is declining. This industrial production or merchandising deficit is now so large that it overwhelms the surpluses in the Services and Income categories.

So the balance on current account goes into the red and stays there. That suggests an imperial economic power in decline, does it not. Just like the UK in the early 20the century.

As for Australia it has good natural and human resources but it can’t trade or pay its way. The conventional explanations– we’re uncompetitive, don’t save enough, always needed foreign capital, etc --don't really explain the dysfunctionality. Yet the dysfunctionality is not being acknowledged---apart from Paul Keating's banana republic remarks in the 1980s.

Gary, I cant find the link sorry, but the break down of trade by state suggested all were reliant on primary production, whether mineral extraction or agriculture. Only South Australia differentiated itself by value adding to primary production with its wine industry. NSW and Victoria were services based, and in deficit.

Turchen argues that empires go through "secular cycles". I am not sure of his use of secular there, but basically they go through a sinusoidal pattern of expansion and decline several times before they actually decline. In the past a decline has been noted through increasing economic inequity.

Given the inflation of salaried upper management, and the decline of wages in middle and working class in the US, that is fairly real. In the past the aristocrats practiced violence against each other, in warfare and duels, once their needs out-stripped the working class's ability to produce to those needs. Cant see that happening in this day and age. Looks like we borrow from overseas instead.