Humpty Dumpty and Global Financial Imbalances

Economists' arguments that today's global trade imbalances reflect either a savings shortage or a savings glut are absurdly misguided. The real problem is inadequate demand in developing countries that have benefited from globalization of production.

WASHINGTON, DC: There is an old saying that goes, “If you have only a hammer, everything looks like a nail.” Nowhere is this clearer than in discussions of the United States’ trade deficit and global financial imbalances, given economists’ tendency to reduce most economic problems to questions of savings. Unfortunately, this focus on savings distorts understanding and distracts from the real challenge of creating mass consumption markets in developing countries.

Within national income accounts, trade deficits represent the excess of a country’s consumption over production. From an accountant’s perspective, that makes it logical to label trade deficits as negative savings.

Most economists go a step further, asserting that the US deficit is caused by a savings shortage. But, since one country’s trade deficit is another’s surplus, US Federal Reserve Chairman Ben Bernanke has argued for turning the conventional logic on its head: rather than resulting from a savings shortage, the US trade deficit is the result of a global savings glut – especially in China.

https://prosyn.org/aVLWMoc