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A Requiem for Global Imbalances

The start of 2014 marks ten years since we began fretting about global imbalances, and specifically about the chronic trade and current-account imbalances of the US and China. A decade later, we can happily declare that the era of global imbalances is over.

BERKELEY – The start of 2014 marks ten years since we began fretting about global imbalances, and specifically about the chronic trade and current-account imbalances of the United States and China. A decade later, we can happily declare that the era of global imbalances is over. So now is the time to draw the right lessons from that period.

America’s current-account deficit, which was an alarming 5.8% of GDP as recently as 2006, has now shrunk to just 2.7% of GDP – a level that the US can easily finance from its royalty income and returns on prior foreign investments without incurring additional foreign debt. Even more impressive, China’s current-account surplus, which reached an extraordinary 10% of GDP in 2007, is now barely 2.5% of national income.

There are still a few countries with worrisomely large surpluses and deficits. Germany and Turkey stand out. But Germany’s 6%-of-GDP surplus is mainly a problem for Europe, while Turkey’s 7.4% deficit is mainly a problem for Turkey. In other words, theirs are not global problems.

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