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global imbalances: the blame game « Previous | |Next »
May 13, 2006

Global economic imbalances cause tensions amongst nation states. The most notable tensions are those between China and the US, which arise from the former pegging the yuan and the latter's record current-account and budget deficits.

What is commonly accepted is that the US is running large fiscal and current account deficits while the rest of the world is running large current account surpluses. The flow of capital that is financing these US twin deficits is mostly (three quarters or so) coming from foreign central banks - mostly in Asia but not exclusively - that are aggressively intervening to prevent an appreciation of their currencies. The differences arise around the causes and solutions.

Since these imbalances are deepseated and difficult to resolve we have a blame game. William Pesek Jr., a columnist for Bloomberg News, outlines the state of play in the blame game.

He says it looks like this:

For a record $805 billion current-account deficit that's clearly unsustainable, the U.S. blames China and Japan. If only officials in Beijing and Tokyo would let currencies rise, the U.S. argues, all would be well. The U.S. almost seems to think it's over-consuming out of a sense of global altruism.

Asians blame the West, especially the U.S., for Asia's policy of parking more than $1 trillion of savings in U.S. debt. Officials in this region claim the U.S. has created a global system to help fund its way of life, and that Asians have little choice but to play along.

Europe blames Asia's mercantilist ways for its declining competitiveness. It seems Europe's weak demand, high unemployment and worsening fiscal position are caused by Asians pushing the euro higher with their dollar purchases.

Pesek offers a gloomy perspective on resolving these imbalances. He says that 'the G-7 can't act as referee because its members are part of the problem. The International Monetary Fund is too busy trying to remain relevant in a world devoid of crises to offer much direction. Of course, if today's imbalances get out of hand, the IMF's bailout abilities won't be up to the challenge. The world economy isn't too big to fail, but too big to save. '

An account of the different interpretations of the causes of the global imbalances and what to do is offered by Nouriell Roubini. He ends his account by saying that the emerging consensus view on the multiple causes of these global imbalances and the need for a cooperative solution requires each major region of the world to do its part. Roubini concludes:

The main obstacle and problem is that the fiscal policy stalemate in Washington: the administration and the Republican Congress live in the delusional dream that the fiscal deficit can be meaningfully reduced without any tax increase (and actually via aggressive and reckless moves to make all the tax cuts permanent). Such reckless policy stance makes the probability of an orderly rebalancing smaller and increases the chances that the global rebalancing will be disorderly and occur through a hard landing of the US and the global economy.

That's not the view of Canberra.

| Posted by Gary Sauer-Thompson at 3:34 PM | | Comments (0)