Working Papers

It’s Not the Imbalances, It’s What You Do With Them

I have an op-ed in today’s Australian on the subject of global imbalances, arguing that it is distortions to capital allocation that make current account ‘imbalances’ problematic:

China will need to liberalise its capital account and domestic financial markets, moving its economy away from forced saving and unproductive, state-driven investment to a more market-driven system of capital allocation.

In this respect, China and the US have more in common than many Americans would like to think.

The US government will also need to extricate itself from its disastrous politicisation of housing finance and its post-crisis role in the US financial system.

In this regard, the US congress is likely to prove just as resistant to change as the Chinese Communist Party.

A less distorted system of capital allocation in both China and the US would have resulted in the more efficient use of global saving than was evident in the run-up to the global financial crisis. But it is unlikely to make much difference to the forces of globalisation driving persistent global imbalances.


posted on 22 January 2010 by skirchner in Economics, Financial Markets

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Stephen, is there a good analysis of how the various US government housing programs and implicitly backed enterprises caused/contributed to the financial crisis?

Posted by .(JavaScript must be enabled to view this email address)  on  01/22  at  11:34 AM

Is it significant that The Economist doesn’t think China’s post GFC boom is a bubble?

What really matters to Australia is whether China’s astonishing appetite for our resources in 2009 will continue.  Investment grew 30% in China last year, but exports fell 16%, imports were down 11%, and retail sales growth slumped from 22% in 2008 to 17% in 2009.  None of this adds up to the much desired “rebalancing” of the Chinese economy away from investment and towards consumption.  In fact, the investment share of GDP is growing and the consumption share shrinking.

It seems everyone agrees that too much investment and too little consumption is a bad thing for China.  Stephen thinks the solution is to “liberalise its capital account and domestic financial markets ... to a more market-driven system of capital allocation”.  Others say China needs a better social safety net to discourage saving and more consumption.  Who knows!  Perhaps they should do both, but they appear to be doing neither.

Whatever the causes and whatever the cure, its undeniable that China’s investment binge saved Australia from the worst effects of the GFC.  70% of our iron ore now goes to China.  Australia’s resource exporters now depend on these ‘imbalances’ continuing, imbalances that everyone thinks will end badly.

Posted by .(JavaScript must be enabled to view this email address)  on  01/22  at  03:55 PM

Rajat: Peter Wallison (AEI) and Charles Calomiris (Columbia) have both written extensively on the subject.  Note that many have underestimated the importance of the GSEs to sub-prime because of the way the GSEs systematically misrepresented the quality of their loan books.

Posted by skirchner  on  01/22  at  04:11 PM

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