"Global Imbalances" are often blamed as one source of the 2008/9 crisis. What are global imbalances? In a nutshell, US consumer, US firms, and the US government were "saving too little" and Asian economies, especially China were "saving too much." What's bad about that? Well the notion is that the excess savings in Asia funded the unsustainable behavior of US consumers/firms/government. At some point something had to give. Here is a good summary (edited) of the issues from Menzie Chinn.
The G-20 and Rebalancing
According to news accounts [WSJ link], rebalancing is going to be a centraltopic.
Olivier Blanchard [IMF Chief Economist] has observed that the world will needto transition from public to private sources of demand and rebalance the globalpattern of growth in demand, “with a shift from domestic to foreign demand inthe United States and a reverse shift from foreign to domestic demand in therest of the world, particularly in Asia.†We hope to agree on the policiesneeded to avoid a return tothe sort of imbalances that contributed to this crisis and put in place aprocess for encouraging all countries to live up to their commitment to supporta transition to a more balanced pattern of global demand growth. Many thepolicies that would support this transition would also strengthen the overallpace of global growth.
Whenever I hear the term "rebalancing", I ampervaded by a sense of déjà vu. We've heard of this hope for years [1] [2] (andI proposed some steps to promote exactly that process in 2005 [3]). Are such hopes any more likely to befulfilled now?
The starting point in such discussions is usually China, partly because of its relatively rapidgrowth rate, and its large trade balances (although, as I've noted previously, China is smallrelative to developed economies [4] [5]), and accumulation of foreign exchangereserves.
Figure1: Chinese trade balance, in billion USDper month (blue, left axis) and Chinese international reserves, in trillion USD(red, right axis). NBER defined recessions shaded gray (assumes recessionbeginning 07M12 ends 09M06). Sources: IMF, InternationalFinancial Statistics, updated using ADB, ARIC database, and author'scalculations.
From my own perspective, I've always thought it odd tointerpret Chinaas the driver. Much better to think ofAmericaengaging in spendthrift behavior (most importantly via tax cuts and taxbreaks/distortions) enabled perhaps by East Asian economies.
But, returning to current events, first note that the US tradebalance has adjusted radically since the onset of the crisis. I don't thinkanyone argues that this very sharp adjustment has been due primarily to Chinesefactors. I'd say recession in the UScombined with credit crunch hitting US consumptionand trade financing, are key.
Figure 2: US goods and services trade balance (seasonally adjusted) to GDP ratio (blue) and US-China goods trade balance (nsa) to GDP ratio (red), and 12 month trailing moving average (maroon). NBER defined recessions shaded gray (assumes recession beginning 07M12 ends 09M06). Sources: BEA/Census, July trade release, Macroeconomic Advisers Sep. 17 release, and author's calculations.
Second, as shown in Figure 2, while the US-China tradedeficit now accounts for a larger share of the total US trade deficit, even thebilateral trade deficit is shrinking as a ratio to GDP (I suspect the tradedeficit will deteriorate somewhat as oil prices rebound, therebyreducing theChina share).
So let me argue for, if not primacy at least equality,for US factors. And here I think the question is what will happen toconsumption (and hence household saving). I think that there is a good chancethat rebalancing will occur.
Figure3: Log real consumption in Ch.2005$(blue, left axis) and log real household net worth (red, right axis),1990Q1-2009Q2. Household net worth deflated by PCE deflator. NBER definedrecessions shaded gray (assumes recession beginning 07M12 ends 09M06). Sources:BEA, 09Q2 2nd release, and Federal Reserve Board, Flow of Funds, Sept. 17release, and author's calculations.
My reasoning is that with household net worth downsubstantially from its peak, consumption growth is likely to remain lacklusterfor a substantial period, as households rebuild their balance sheets. In addition, the deleveraging ofthe financial sector is likely to make access to credit more difficult, furtherconstraining consumption beyond the impetus to rebuild net wealth.
Of course, just because rebalancing occurs doesn't meanall is happy in the world. Given that consumption is 70% of GDP (in nominalterms), slow consumption growth suggests slow GDP growth, in the absence ofsome alternative source of aggregate demand (net exports, government spending).
I note that Simon Johnson is skeptical of this call forrebalancing in the medium run. I agree that it's hard to see any means ofcredibly precommiting to implement policies that would enhance rebalancing. Butmy thesis is that many of the forces in play — deleveraging, higher householdsaving — might very well accomplish a lot of what did not occur during theprevious eight years. See also Justin Fox's and Martin Wolf's views.
