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Tuesday, September 27, 2005

Tiptoe Through the Rebalancing Mine Field

The Economist has advice for the U.S., China, and Europe on how to achieve rebalancing, with the U.S. budget deficit high on the list of places to start.  This complements Greenspan's remarks and concerns on deficits and on rebalancing both internally and externally.  However, Greenspan expresses more concern than this article over the risks of the rebalancing process and the title of this post was chosen to emphasize the risks that rebalancing brings about:

Rebalancing Act: How to tame the thrift shift, The Economist: If the first step towards finding a solution is to agree on the problem, the world's policymakers are still a long way from solving the global imbalances. European politicians blame American profligacy, urging Mr Bush's government to cut its budget deficit. Chinese politicians echo those sentiments. Yet for American lawmakers on Capitol Hill, there is only one villain: China and its undervalued currency. The analysis in the White House is more sophisticated, but still tends to Mr Bernanke's view that America's current-account deficit is not “made in the USA”. ... All of this misses the bigger picture. The current pattern of global imbalances is the result both of thrift shifts abroad and of American actions. ... America's current rate of borrowing is excessive. Despite the advantages of having the world's reserve currency, an enviable rate of productivity growth and the world's most liquid capital markets, America cannot continue to borrow at an accelerating pace forever. More important, ... Most of that foreign money is going into consumption and housing rather than boosting investment in productive American assets. Building houses does not raise long-term economic growth in the way that equipping a factory does. And the current rate of consumption, fuelled by housing wealth, leaves many indebted consumers at risk... Unfortunately, there is little sign that anything will change very quickly...

What, then, needs to be done? For a start, recognise who has to be involved. Given the size of their saving surpluses, oil-exporting countries should be at the centre of the discussion. Yet they are rarely even invited to G8 summits and other global policy pow-wows. The rich countries have understood the importance of including China in their gatherings. ... But when politicians are discussing global imbalances, they will have to broaden the guest list further. More important, their “to do” list needs to be revised. Reducing China's saving surplus is about more than simply calling for a stronger yuan. It means creating the conditions that encourage more efficient investment and reduce the need to save quite so much. That requires more emphasis on corporate and financial reform ... It also means persuading China's government to spend more on social safety nets. ... Higher public spending—on hospitals, schools and helping the poor—will itself reduce China's national saving rate, and creating better health, education and pension systems will reduce the incentive to save so much. Japan's example suggests that there is no particular Asian propensity for thrift... Europe, too, would do well to adopt ... policy stimulus. The European Central Bank remains too reluctant to cut interest rates. Europe does not need, and cannot afford, a fiscal binge of American proportions, but the recent lesson from Japan is that if economies stagnate, government debts spiral.

If the rest of the world could do with a less puritan take on thrift, America needs to be reminded of its virtues. ... less government borrowing is still the most certain route to higher national saving. ... Convincing the American people to save more is trickier. ... There are plenty of reasons for America to carry on borrowing from abroad. It has better demographic prospects than the rest of the rich world, and indeed than many Asian emerging markets. It has nimble and productive firms. ... But the present deficit is excessive and dangerous. Left alone, it could end in a global recession, rampant protectionism, and even a disastrous financial crash. That is why policymakers need to act soon. With his “saving glut” speech, Mr Bernanke focused attention on the scale of the global thrift shift. Now, as one of Mr Bush's top economic advisers, he should persuade his boss of the importance of making the thrift shift safe.

[Note: The original article has a different picture.]

UPDATE:  Guest blogger Menzie Chinn discusses current account deficits at Econbrowser. 

    Posted by on Tuesday, September 27, 2005 at 01:51 AM in Budget Deficit, China, Economics, International Finance, Monetary Policy | Permalink  TrackBack (1)  Comments (10)


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