The Global Imbalances: will they end
in tears?
Martin Wolf, Associate Editor & Chief Economics
Commentator, Financial Times
Leverhulme Centre for Research on Globalisation and
Economic Policy, School of Economics, Nottingham University
March 9th, 2006
1. Deficits, debt and the dollar
“Over the past decade a
combination of diverse forces has
created . . . a global saving glut.”
Ben Bernanke, Governor of the
Federal Reserve, March 10th 2005
2
1. Deficits, debt and the dollar
“Long-term rates have moved lower
virtually everywhere.” Alan
Greenspan, chairman of the Federal
Reserve, June 6th 2005
3
1. Deficits, debt and the dollar: outline
• Greenspan’s “conundrum”
• Global excess savings
• Global “imbalances”
• US as spender and borrower of last resort
• The end-game
4
1. Conundrum
• Why have monetary and fiscal policies been so loose?
• Why are global real interest rates so low?
• Why is the US running huge current account deficits?
5
1. Conundrum: long-term real rates
WORLD REAL LONG-TERM INTEREST RATE
8
6
4
2
0
-2
-4
6
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
-6
0
7
BRIT.GOVT.IL 5% INFL.OVER 5 YEAR
US TIPS - 10 YR
01/01/2006
01/10/2005
01/07/2005
01/04/2005
01/01/2005
01/10/2004
01/07/2004
01/04/2004
01/01/2004
01/10/2003
01/07/2003
01/04/2003
01/01/2003
01/10/2002
01/07/2002
01/04/2002
01/01/2002
01/10/2001
01/07/2001
01/04/2001
01/01/2001
1. Conundrum: real interest rates
REAL INTEREST RATES
3
2.5
2
1.5
1
0.5
1. Conundrum: US current account
US CURRENT ACCOUNT BALANCE
(as per cent of GDP)
2
1
0
-1
-2
-3
-4
-5
-6
8
04
3
1
03
Q
3
01
Q
00
Q
1
98
Q
97
3
Q
95
1
Q
94
3
Q
92
1
Q
91
3
Q
89
1
Q
88
3
Q
86
1
Q
85
3
Q
83
1
Q
82
3
Q
80
1
Q
79
3
Q
77
1
Q
76
1
3
Q
3
74
Q
1
73
Q
3
71
Q
Q
Q
1
70
-7
1. Conundrum: conclusion
• Exceptionally aggressive monetary and fiscal policies,
to escape the slow down
• Low real rates, despite the strong global economic
growth
• Exploding US current account deficits
• What is going on?
9
2. Savings surpluses and deficits
• What lies behind all this is a move into surplus of
savings over investment in a wide range of countries
• In some case savings have risen more than
investment
• In some cases investment has fallen
• In some cases savings have risen and investment has
fallen
• In important cases, the private sector’s excess savings
has risen sharply, creating both fiscal deficits and
current account surpluses
10
2. Savings surpluses
SAVINGS AND INVESTMENT
(per cent of world GDP)
IMF WEO September 2005
25
20
15
10
5
Advanced Economies Saving
Emerging Markets and Oil Exporters Saving
11
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
0
Advanced Economies Investment
Emerging Markets and Oil Exporters Investment
2. Savings surpluses
SAVINGS AND INVESTMENT IN JAPAN
(per cent of GDP)
45
40
35
30
25
20
15
10
5
0
Saving
12
Investment
Current account
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
-5
2. Savings surpluses
SAVINGS AND INVESTMENT IN THE EUROZONE
(per cent of GDP)
35
30
25
20
15
10
5
Saving
13
Investment
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
0
2. Savings surpluses
SAVINGS AND INVESTMENT IN EAST ASIAN EMERGING ECONOMIES
(per cent of GDP)
40
35
30
25
20
15
10
5
0
-5
Saving
14
Investment
Current account
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
-10
2. Savings surpluses
SAVINGS AND INVESTMENT IN CHINA
(per cent of GDP)
60
50
40
30
20
10
0
Saving
15
Investment
Current account
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
-10
2. Savings surpluses
SOURCES OF CHINESE SAVINGS
(per cent of GDP)
25
20
15
10
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Household
16
Enterprise
Government
2. Savings surpluses
SAVINGS AND INVESTMENT OF OIL PRODUCERS
(per cent of GDP)
35
30
25
20
15
10
5
0
-5
Saving
17
Investment
Current account
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
-10
2. Savings surpluses
SAVINGS AND INVESTMENT IN OTHER EMERGING MARKET
ECONOMIES
(per cent of GDP)
30
25
20
15
10
5
0
-5
Saving
18
Investment
Current account
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
-10
2. Savings surpluses
SAVINGS AND INVESTMENT IN THE US
(per cent of GDP)
25
20
15
10
5
0
-5
Saving
19
Investment
Current account
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
-10
2. Savings surpluses
SOURCES OF SAVINGS IN THE US
(per cent of GDP)
25
20
15
10
5
0
Public
20
Corporate
Household
Total
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
-5
2. Savings surpluses: conclusion
• The world is awash with excess savings
• Almost every region is in surplus, except
• The Anglosphere (and central and eastern Europe)
• All this must be equilibrated through the global balance
of payments
• And, of course, it is
21
3. Global “imbalances”
Source: IMF
THE EMERGENCE OF GLOBAL "IMBALANCES"
(per cent of world GDP)
1.5
1
0.5
0
-0.5
-1
-1.5
-2
1996
1997
1998
United States
22
1999
Asia
2000
2001
Eurozone, Switzerland and Nordics
2002
Oil exporters
2003
2004
3. Global “imbalances”
ASIA'S ROLE AS A SURPLUS REGION
(per cent of world GDP)
Source: IMF
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
-0.2
1994
1995
1996
1997
1998
Japan
23
1999
2000
Emerging Asia
2001
2002
2003
2004
3. Global “imbalances”
• Two broad groups of countries
– Mature high-income countries with slowly growing
economies and chronic excess savings. Japan and
“Old Europe” generated a combined current
account surplus of $336bn in 2004, up from $189bn
in 1996
– BUT the rest of the world – the emerging market
economies - have moved from minus $99bn in 1996
to $323bn in 2004
– Thus the swing for the high-income countries was
$147bn, but the swing for the rest was $421bn
24
3. Global “imbalances”
BALANCE OF PAYMENTS OF EMERGING MARKET ECONOMIES ($bn)
$800.0
$600.0
$400.0
$200.0
$0.0
-$200.0
-$400.0
-$600.0
1995
1996
1997
1998
Change in reserves
25
1999
2000
Current account balance
2001
2002
Direct investment, net
2003
2004
Other private flows
2005
2006
3. Global “imbalances”
BALANCE OF PAYMENTS OF EMERGING ASIA
$300.0
$200.0
$100.0
$0.0
-$100.0
-$200.0
-$300.0
-$400.0
1995
1996
Change in reserves
26
1997
1998
1999
2000
Current account balance
2001
2002
2003
Direct investment, net
2004
2005
Other private flows
2006
3. Global “imbalances”
CHINA'S BALANCE OF PAYMENTS ($bn)
$150.0
$100.0
$50.0
$0.0
-$50.0
-$100.0
-$150.0
-$200.0
-$250.0
1996
1997
Current Account
27
1998
1999
2000
Private direct investment, net
2001
2002
2003
Other private flows
2004
2005
2006
Change in reserves1
3. Global “imbalances”
BALANCE OF PAYMENTS OF THE MIDDLE EAST ($bn)
$300.0
$250.0
$200.0
$150.0
$100.0
$50.0
$0.0
-$50.0
-$100.0
1995
1996
Change in reserves
28
1997
1998
1999
2000
Current account balance
2001
2002
2003
Direct investment, net
2004
2005
2006
Other private flows
3. Global “imbalances”
BALANCE OF PAYMENTS OF THE CIS ($bn)
$150.0
$100.0
$50.0
$0.0
-$50.0
-$100.0
-$150.0
1995
1996
Change in reserves
29
1997
1998
1999
Current account balance
2000
2001
2002
2003
Direct investment, net
2004
2005
Other private flows
2006
3. Global “imbalances”
• It is not just the current account surplus. Asian
emerging countries are also recycling the
capital inflow
• This is particularly true for China, Taiwan,
India and South Korea
• This supports the dollar within the new Bretton
Woods area
30
So
ut
N hA
ew fr
Ze ica
al
a
Au nd
st
ra
lia
Eu
Sw r o
ed
C en
Sw ana
itz da
er
la
n
Po d
l
a
U
K nd
So Po
ut un
d
h
Ko
re
a
Ja
Si p a
ng n
ap
o
Th re
ai
la
nd
In
d
R ia
us
si
a
C
In hin
do a
ne
M sia
al
a
H ysi
K
a
Do
lla
Tu r
rk
e
M y
ex
Ar ic
ge o
nt
in
a
3. Global “imbalances”
CURRENCY MOVEMENT AGAINST THE US DOLLAR
(31st December 2002 - 20th October 2005)
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%
-60.0%
31
3. Global “imbalances”
FOREIGN CURRENCY RESERVE ACCUMULATION ($bn)
$4,500
rest of world
Saudi Arabia
$4,000
Russia
$3,500
rest of Asia
$3,000
Indonesia
Thailand
$2,500
Singapore
$2,000
India
Hong Kong
$1,500
Korea
$769
$1,000
Taiwan
$557
$500
$437
$0
Total
32
China
$825
December 2001-September 2005
Japan
3. Global “imbalances”
STERILISATION
(reserves growth, less growth of base money, as per cent of GDP)
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
China
Source: IMF
33
India
NIEs
2002
2003
2004
ASEAN-4
3. Global “imbalances”
RESERVES AS A PER CENT OF IMPORTS
250.0%
200.0%
150.0%
100.0%
50.0%
0.0%
Japan
China
Taiwan
S. Korea
1996
34
HK
2000
2004
India
Singapore
Russia
3. Global “imbalances” : conclusion
• The rest of the world is generating large savings
surpluses and parking them in the US
• The big swings are the result of the financial crises of
the 1990s and the recent oil price surge
• These persuaded the Asian emerging market
economies to stick with export-led growth
• They are running current account surpluses and
recycling capital inflows
• This keeps the dollar up against their currencies
35
4. US as spender of last resort
• US seeks internal balance
• It accommodates the external imbalance imposed by
the rest of the world
• As issuer of the world’s key currency, it is in a unique
position to be the world’s spender of last resort
• In seeking internal balance in the US, the Federal
reserve generates internal balance in the open
economies of the rest of the world
• It does this by offsetting their desired export surpluses
36
4. US as spender of last resort
FINANCIAL BALANCES OF THE US ECONOMY
(per cent of GDP)
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
-4.00%
-6.00%
-8.00%
-10.00%
196001
196501
197001
197501
Private
Sector
37
198001
PSBR
198501
199001
Foreign lending
199501
200001
4. US as spender of last resort
ALTERNATIVE PATHS FOR US NET LIABILITIES
(per cent of GDP)
20.0%
0.0%
-20.0%
-40.0%
-60.0%
-80.0%
-100.0%
38
14
12
Imports growing at the export trend
Current account constant share of GDP
20
20
08
10
20
20
04
06
20
20
00
02
20
20
98
96
Historic export and import trends
Exports growing 10% & imports 5%
19
19
92
94
19
19
88
90
19
19
84
86
19
19
80
82
19
19
78
19
19
76
-120.0%
4. US as spender of last resort
EXPORTS AND IMPORTS AS A SHARE OF GDP
(current prices, per cent)
20.0
15.0
10.0
5.0
0.0
-5.0
Q
1
7
Q 0
3
7
Q 1
1
7
Q 3
3
7
Q 4
1
7
Q 6
3
7
Q 7
1
7
Q 9
3
8
Q 0
1
8
Q 2
3
8
Q 3
1
8
Q 5
3
8
Q 6
1
8
Q 8
3
8
Q 9
1
9
Q 1
3
9
Q 2
1
9
Q 4
3
9
Q 5
1
9
Q 7
3
9
Q 8
1
0
Q 0
3
0
Q 1
1
0
Q 3
3
04
-10.0
US EXPORTS OF GOODS & SERVICES
39
US IMPORTS OF GOODS & SERVICES
US NET EXPORTS
4. US as spender of last resort
REAL EXCHANGE RATE FOR THE US AND CHINA
(JP Morgan)
140
120
100
80
60
40
US
40
China
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-88
Jan-86
Jan-84
Jan-82
Jan-80
Jan-78
Jan-76
Jan-74
Jan-72
0
Jan-70
20
4. US as spender of last resort
• The macroeconomic variables: domestic
income and expenditure and capital inflows
from abroad are accommodating the growing
structural deficit.
• The current account tail is wagging the
domestic economic dog
• It will take a large adjustment in relative growth
of exports and imports to halt the deteriorating
trend
41
5. End-game
• Is it plausible that the surpluses will begin to shrink?
– In Japan and western Europe it is not very likely. These are natural
surplus regions
– In the oil exporters, it is quite likely, though they would be wise not to
spend the windfall at once
– The crucial players are the Asian emerging countries, since they
could afford to run current account deficits
42
5. End-game
• There are good reasons for the Asian countries to alter their
policies:
– It is hard to sterilise the monetary impact of huge reserve
accumulations
– Real returns on the assets they own are low and, ultimately,
likely to be negative when currencies adjust
– Subsidising exports through an undervalued exchange rate
and unhedged lending in foreign currencies is expensive
– Reserves are now adequate
– And so insurance has become excessively expensive
43
5. End-game
• But there are also advantages to sustaining the dollar
– It gives economies a monetary anchor
– It preserves export competitiveness
– It creates a de facto Asian monetary system
– It “pays for” US-provided security
44
5. End-game
• The big decision-maker is China
– It is prepared to buy an acquiescent US, but nobody knows on
what scale (including, I think, the Chinese)
– It does not know how far to let the currency appreciate
– And it is not sure what the best exchange-rate regime would
be
– This is just not a high priority
45
5. End-game
• What about the US?
• As John Maynard Keynes said: If you owe your bank
manager £100, you have a problem. If you owe him
£1m, he has a problem
• The US enjoys a huge transfer of resources – greater
than the fiscal deficit or its entire military spending
• This is guns and butter
46
5. End-game
• So what are the drawbacks?
– Industries producing tradeable goods and services are
weakened
– Protectionist pressure increases
– If the fiscal deficit is to be reduced, the private sector’s
financial deficit must be pushed upward again to very high
levels
– That would demand monetary loosening and debt expansion
– If credit were to be cut off, the dollar would plunge, inflation
would rise, interest rates would rise and the economy would,
almost certainly, go into recession
– The creditors are not necessarily friendly
47
5. End-game
• The longer the delay the bigger the adjustment
• The best approach would be a deal with Asia
– Exchange rate adjustment
– Fiscal tightening in the US
– Expansionary policies in Asian emerging markets, together
with structural reform
• A co-operative solution or a mess looms ahead
48