Will Global Imbalances Return?

BEIJING – Future history books, depending on where they are written, will take one of two approaches to assigning blame for the world’s current financial and economic crisis.

One approach will blame lax regulation, accommodating monetary policy, and inadequate savings in the United States. The other, already being pushed by former and current US officials like Alan Greenspan and Ben Bernanke, will blame the immense pool of liquidity generated by high-savings countries in East Asia and the Middle East. All that liquidity, they will argue, had to go somewhere.  Its logical destination was the country with the deepest financial markets, the US, where it raised asset prices to unsustainable heights.

Note the one thing on which members of both camps agree: the global savings imbalance – low savings in the US and high savings in China and other emerging markets – played a key role in the crisis by allowing Americans to live beyond their means. It encouraged financiers desperate to earn a return on abundant funds to put them to more speculative use. If there is a consensus on one issue, it is the impossibility of understanding the bubble and the crash without considering the role of global imbalances.

Preventing future crises similar to this one therefore requires resolving the problem of global imbalances. Here, the early signs are reassuring. American households are saving again. The US trade deficit has declined from $60 billion a month to just $26 billion, according to the most recent data. As a matter of simple arithmetic, we know that the rest of the world is running correspondingly smaller surpluses.