A Balanced Look at Sino-American Imbalances
In the long run, America’s growth pattern must undergo a structural shift from reliance on debt and consumption to an economy driven by America’s ability to innovate and create. But in the short run, the US current-account deficit will remain, regardless of which country runs bilateral surpluses.
BEIJING – Before July 2007, most economists agreed that global imbalances were the most important threat to global growth. It was argued that the United States’ rising net foreign debt-to-GDP ratio – the result of chronic current-account deficits – would put a sharp brake on capital inflows, in turn weakening the dollar, driving up interest rates, and plunging the US economy into crisis.
But this scenario failed to materialize. Instead, the crisis stemmed from the US sub-prime debacle, which quickly dragged the global economy into its deepest recession since the 1930’s.
Most economists failed to foresee the economic dynamics that actually led to the crisis, because they failed to pay enough attention to the rapid increase in US total debt. Instead, they focused exclusively on US foreign debt, ignoring household debt (mortgage and consumer debt), public debt, business debt, and financial debt.
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