Who Will Run the World’s Deficits?

SINGAPORE – These days everyone seems to want to run a current-account surplus. China has long run large surpluses. The eurozone is now running even larger ones, with swings in southern Europe augmenting Germany’s longstanding surpluses. Indeed, countries from Singapore to Russia are running large surpluses.

Meanwhile, America’s external deficit – which for decades has helped to sustain surpluses elsewhere – is now smaller than it was before 2008, with many economists arguing that it should never revert to its previous levels (they argue that the shale-gas boom makes this unlikely, anyway). Financial markets have also made clear that the ability of other major deficit countries, like Brazil and India, to absorb capital flows is reaching its limit. Since the world is a closed system, this raises the question: Who will run the world’s deficits?

Mainstream economists believe that the global economy should function as a balanced mechanical arrangement in which external surpluses and deficits are smoothed out over time. But periods of global economic expansion have virtually always been characterized by symbiotic imbalances.

One part of the world runs large deficits for a prolonged period, creating demand; another part of the world runs surpluses, financing its counterparts’ deficits. This was true of Roman-Indian trade in the first and second centuries, and of the age of European exploration in the sixteenth century. It was also true of the two Bretton Woods arrangements, in which the US ran the necessary deficits.