The world economy, as I see it, remains very much in a state of fundamental disequilibrium. A US-centric global growth dynamic has given rise to extraordinary external imbalances around the world. America, the world's unquestioned growth engine, is facing unprecedented imbalances of its own; the national saving rate, current account, Federal budget deficit, and private sector debt ratios are all at historical extremes. And an increasingly powerful global labor arbitrage continues to keep high-wage developed economies mired in jobless recoveries. The result is a unique confluence of tensions that have left the global economy in a state of heightened instability. The venting of those tensions could well be the main event in world financial markets in 2004.
The case for global rebalancing has been an overarching theme of our macro call over the past year. The urgency of such a realignment in the mix of world economic growth has never been more compelling. Over the 1995-2002 period, the United States accounted for 96% of the cumulative increase in world GDP - basically three times its 32% share in the global economy. This was, by far, the most lopsided strain of global economic growth that has ever occurred in the modern-day post-World War II era. Two sets of forces have been at work in creating this unsustainable condition - a US economy that has been living beyond its means as those means are delineated by domestic income generation, and a non-US world that is either unwilling or unable to stimulate domestic demand. As a result, an unprecedented disparity has opened up between those nations with current-account deficits (the United States) and those with surpluses (Asia and, to a lesser extent, Europe). Such an unbalanced global growth paradigm is not sustainable, in my view. The debate is over the terms under which the coming rebalancing occurs. ...Continued
Monday, December 29, 2003
Major Global Imbalances
Not that I thoroughly agree with Stephen's solution to our problems, but he sure points out one band-aid alternative to our drastic problems of imbalance. I would sooner see a real reform of the entire international financial architecture as outlined by Paul Davidson, myself, and many others posted on the entirety of this blog. I believe our trade and financial problems are much more serious than Stephen paints. The global labor arbitrage is not going to go away by simple currency realignments while China maintains its peg. The ppp comparative disadvantages of OECD nations with the less developed world are truly beyond textbook realities of easy solution, and must be rectified by major monetary system reform. I see no other truly workable alternative. If others do, let me know.