China, some of the emerging countries, the oil exporters, Germany and Japan
were building up huge current account surpluses, while the US, the UK,
Australia, some other European countries such as Spain and Ireland, and
central and eastern European countries were enormously in deficit.
In dollar terms the sums seemed huge. For instance, the US had in 2006 a
current deficit of $760bn, while by 2008 the Chinese surplus was well over
$400bn and that of the “fuel exporters” over $600bn. In relative terms the
numbers are much less frightening. At their 2008 peak, on International
Monetary Fund estimates, the global imbalances amounted to 2½ per cent of
world gross national product, measured by total surpluses or deficits.
Implausible
Nevertheless, they worried many observers. Indeed, to the extent to which the
present recession was even faintly foreseen, it was expected to come from a
run on the dollar triggered by these imbalances. We may or may not be seeing
the beginning of such a run now, but its timing makes it quite implausible
as a recession trigger.
I am afraid I could never see what the fuss was about. International capital
flows, which are the counterpart to these imbalances, are a normal feature
of a global economy.
Some of the fuss was at bottom moralistic. A poor country such as China should
not be lending to finance a US consumer boom. Or if the Chinese surplus
could not be helped, at least it should have been passed on to other
emerging countries.
If US voters had shared these feelings of the east coast economic
intelligentsia, the remedy would have been straightforward: impose a value
added tax to curb domestic consumption and use the proceeds for aid or loans
to developing countries.
I leave aside for the moment the debate on the efficacy of such aid. But as
the US public was not of this mind, its role as consumer of last resort
staved off world recession for many years.
Correction
In any case, those who fear imbalances should be reassured. Total imbalances
are estimated by the IMF to be slashed this year to 1½ per cent of world
gross domestic product.
This may be an underestimate of the correction, as the IMF admits. For, like
most national forecasters, it works on the absurd assumption of unchanged
exchange rates.
On the surplus side, the correction is expected to come from the oil-exporting
countries and, to a lesser extent, from Japan and Germany. None of the
adjustment comes from China.
On the deficit side, far and away the biggest reduction in red ink comes from
the US, with the rest spread out among a number of countries. It should be
said that the IMF expects a return to larger imbalances in future years; but
as most of this is due to the reappearance of our old friend the
“statistical discrepancy”, little more can be said here.
Simpler
It is possible to give a simpler analysis than the IMF’s of these imbalances,
based on the hypothesis of a world savings glut advanced by Ben Bernanke,
chairman of the US Federal Reserve. This is a modern version of the
over-savings theory of recession first advanced by John Maynard Keynes.
A feature of Keynesian analysis that few understand is that you never see a
surplus of savings over investment in the figures as these two are defined
to be identical. (When we had the opposite problem of a supposed
“inflationary gap”, Milton Friedman described a vain drive through the
Appalachian mountains looking for a gap that never appeared.)
If attempted savings exceed perceived investment opportunities, the first
thing that happens is that interest rates fall – Greenspan or no Greenspan.
When they have fallen as far as practical, the stress is taken by falling
output and jobs: hence the recession and also the shrinkage of “imbalances”.
Recovery depends on a rediscovery of investment opportunities – “animal
spirits” if you really must – reduced attempted savings or injection of
demand by governments or central banks.
China is not going to save less because of western lectures, which would be
better directed to the political tyranny in that country.
Until western consumers have reduced their indebtedness to reasonable
proportions, demand must be supported by the monetary injections and budget
deficits now in place, and possibly more of them.
Thus the IMF is right to warn against premature withdrawal of these stimuli.
British Tory Bourbons who want a draconian belt-tightening policy either
have not read these warnings or think they know better.
Greedily
Please note that I have got so far without once mentioning banks other than
central banks. Commercial banks certainly worsened the recession by greedily
seeking higher returns than those provided by market interest rates; and
they can put grit in the recovery by refusing to lend.
I can only suggest making Paul Krugman, the radical Keynesian economist,
Comptroller of the US Currency with over-reaching powers to take over old
banks and initiate new ones, with similar appointments in other countries.
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