A Requiem for Global Imbalances

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.

Back in 2004, there were two schools of thought on global imbalances. The Dr. Pangloss school dismissed them as benign – a mere reflection of emerging economies’ demand for dollar reserves, which only the US could provide, and American consumers’ insatiable appetite for cheap merchandise imports. Trading safe assets for cheap merchandise was the best of all worlds. It was a happy equilibrium that could last indefinitely.