The Deficit Tango
Today, much of the world is fixated on current-account imbalances, with surplus countries demonized by deficit countries for supposedly hoarding demand, and deficit countries demonized by surplus countries for their supposed profligacy. But, while the preoccupation with imbalances is justified, the assumptions often underlying it are not.
GENEVA – During the early 2000s, there were myriad warnings that the world economy was headed for a crisis, owing to large and persistent external imbalances. The doomsayers turned out to be only half right: the world economy did go into a tailspin, beginning in the summer of 2007, but not because of the imbalances.