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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