World Economic Forum Special Report: Contents
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Brian Reading Director Lombard Street Research |
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The world is suffering unprecedented financial imbalances between and within economies. Their inevitable reduction, whenever and wherever, will dominate global growth prospects over the next several years. The most spectacular imbalances are the US current account deficit and its domestic counterparts, government and household sector financial deficits. Some say that American profligacy (the spending spree) is to blame. This was accepted wisdom a few years ago. Others blame the Eurasian savings glut – shorthand for excessive thrift in China, Japan, the Asian Tigers, Russia and north-central Europe (Germany, Benelux, Switzerland and the Nordic countries). My Lombard Street Research colleague, Charles Dumas, was first to point the finger at Eurasian thrift in 2004 and document the potential dangers. Ben Bernanke, then Federal Reserve vice-chairman and now chairman, popularized this view in March 2005. It must be right. It is easy to see why. How could American profligacy have caused Eurasian thrift? It would have had to crowd out Eurasian spending via product-price inflation and high real interest rates. How could Eurasian thrift have caused American profligacy? It would have had to crowd out American savings via asset-price inflation and historically low real interest rates.