India Conference on Finance

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GLOBAL IMBALANCES AFTER THE ECONOMIC CRISIS
Dimitri B. Papadimitriou
Levy Economics Institute
International Development Economics Associates
(IDEAs) Conference Reforming the Financial
System Proposals, Constraints and New
Directions January 25-27, 2010, Muttukadu,
Chennai, India
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Outline

• Global imbalances and the crisis
• Origins of the U.S. external deficit
• The role of China and oil exporters
• Plausible future scenarios
• Measures to address global imbalances

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The savings glut hypothesis

• I will argue that over the past decade a
  combination of diverse forces has created a
  significant increase in the global supply of
  saving - a global saving glut - which helps to
  explain both the increase in the U.S. current
  account deficit and the relatively low level of
  long-term real interest rates in the world today.
• () the developing and emerging-market countries
  that brought their current accounts into surplus
  did so to reduce their foreign debts, stabilize
  their currencies, and reduce the risk of
  financial crisis
• (..) Because investment by businesses in
  equipment and structures has been relatively low
  in recent years () much of the recent capital
  inflow into the developed world has shown up in
  higher rates of home construction and in higher
  home prices. Higher home prices in turn have
  encouraged households to increase their
  consumption Bernanke (2005)

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Chinese External Sector
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Chinese International Reserves
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Current Account Behavior for Oil Exporters
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Key Global Current Account Balances
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U.S. Net Foreign Assets and Current Account
Balance
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Foreigners Role in Financing U.S. Government
Deficit
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Foreign Holdings of U.S. Treasury Securities
Japan China Germany Oil exporters U.K. Financial centers
Dec. 2000 31.3 5.9 4.8 4.7 4.9 8.2
Dec. 2006 29.6 18.9 2.2 5.2 4.4 7.9
Aug. 2009 21.2 23.1 1.6 5.5 6.5 9.9
Source Dep. of the Treasury Financial centers
Caribbean Banking Centers, Luxembourg, Switzerland
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The Conceptual Framework
Accounting Identity of Financial Balances
In 2008 the identity was roughly like this 1.1
of GDP -6.0 of GDP -4.9 of GDP
Third quarter 2009 the identity was roughly like
this 7.9 of GDP 10.9 of GDP -3.0 of GDP
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U.S. Main Sector Balances and Real GDP Growth
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Private Sector Borrowing Historical Data and
Baseline Assumptions
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Congressional Budget Office Projections for the
Federal Budget
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Main Sector Balances in Baseline Scenario
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U.S. Exports by Country of Destination
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Main Sector Balances in Scenario 1, Postponed
Deficit Reduction
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U.S. Dollar Exchange Rate (Broad Index) Actual
and Projected
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Main Sector and Trade Balances in Scenario 2,
U.S. Dollar Devaluation and Some Deficit Reduction
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Global Rebalancing is Necessary
Private Consumption as a Share of GDP
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Policies to correct imbalances

• Revaluation of the currencies of surplus
  countries will be effective in reducing both
  global and U.S. domestic imbalances
• Such revaluation will require concerted actions
  of Central banks, particularly in East Asia
• Energy policies can reduce the impact of oil
  price changes on the U.S. trade balance, and the
  U.S. oil trade deficit

If these fail then . . .
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Unpopular Policies may become necessary

• Under WTO rules (Article 12), external imbalances
  can be addressed through protectionist-type
  measures
• - non-selective import tariffs
• - import certificates (Buffet proposal)
• - import certificates (Levy Institute version)
• The more effective resolution can probably be
  achieved only via an international agreement that
  would change the international pattern of
  aggregate demand, combined with a change in
  relative prices. Together, these measures would
  ensure that trade is generally balanced at full
  employment.

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Thank You