Global imbalances: The bears zero in on Goldilocks
The causes of unprecedented global financial imbalances are complex, and understanding them is key to predicting what happens next. But do global economic prospects, as Brian Reading suggests, boil down to a simple question: will Americans stop wanting to borrow and spend before Eurasians stop wanting to save and lend?
Lombard Street Research
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.