Global imbalances: out with a bang?

September 22, 2009

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

The simplest way to end the imbalances in the world’s economy is also sadly perhaps the most likely: for the Chinese to stop buying U.S. debt.

This is not going to happen anytime soon, for one thing deleveraging in the U.S. will for a time make U.S. Treasuries look good value, but a buyer’s strike is a heck of a lot more likely than the orchestrated rebalancing the U.S. will push at this week’s G-20 meeting of leading nations.

The U.S. plans to advance a plan at the Pittsburgh summit to fundamentally change the balance of the global economy, which over the past 15 years or so has been characterized by over-borrowing and consumption in the West provided and financed by savers and workers in Asia.

That state of play kept going, as is the way of these things, until it stopped, or rather until one of its wheels fell off. It wasn’t that Asians stopped saving or buying U.S. debt but that speculators, usually in Europe, stopped buying securities, often minted in London, which were being created to front run the flow of capital from Asia to the west.

That popped the asset price bubble and the flow of finance to consumers in the U.S. who, with much gnashing of teeth, began to save again and consume more guardedly.

But the debt bubble hasn’t really popped, it has only shifted shape. Before we had private debts which only could be repaid if assets, mostly real estate, continued to go up in value. Now, a new wave of public borrowing is cushioning the downturn. Asians buy some of the debt and some of the money raised buys goods from Asia.

Theoretically, China and other investors in U.S.  Treasuries buy them because they believe that the U.S. will ultimately tax more, spend less and make good. In reality, it is more vendor financing and a good money after bad attempt to protect earlier investments.

The U.S. points out, in a letter to its G20 partners, that if the savings rises in the deficit countries persist and there is no rise in consumption in the savings-bloc, global economic growth will be poor. The idea, it seems, is for IMF-led international coordination to, on the one hand, jawbone the borrowers so they remain credible while at the same time somehow inducing the savers to allow their currencies to appreciate and induce their citizens to spend.


A new study of global imbalances by economists at the Bank of England points out that Asian savers will only carry on buying western debt so long as they believe it to be high quality.

“In the short run, increased supply of government bonds resulting from the expansionary fiscal policies pursued in deficit countries has provided an ongoing source of asset supply to meet the investment demand from surplus countries,” according to the Bank of England.

“However, to the extent that savers in surplus countries may become more reluctant over time to invest funds in deficit-country government bonds this would tend to raise the cost of borrowing in deficit countries. This shift in the relative cost of borrowing could be an important part of the process by which a rebalancing of demand from deficit to surplus countries is achieved over the medium term.”

In other words, if Asian savers lose faith in Treasuries or gilts, they will stop buying, causing interest rates to spike. This would cause demand to be rebalanced, all right, but mostly by suppressing it in the U.S. and other highly indebted countries like Britain.

This kind of loss of faith in markets can be very sudden. You could draw a parallel to the way in which investors in securitized debt lost faith in the value of a AAA rating, except this time the loss of faith will be in sovereign borrowers and we really will not be able to blame the ratings agencies as enablers.

China and other exporters of course have good reason to want to avoid this. They are stuck with trillions of dollars in Treasuries and they certainly don’t want to kill the U.S. goose while it is still more profitable to sell it goose food.

There may also come a time when the world’s savers calculate that they can earn more by investing at home.

Essentially much of what a controlled rebalancing would do – weaken the dollar and build opportunity for domestic-oriented investment in Asia – creates incentives for a rapid reallocation out of Treasuries.

Ultimately the rebalanceing must happen. The U.S. for very good reasons wants this to happen little by little, but it does not have to happen that way. Past attempts at a controlled rebalancing have failed and it is hard to see what will make this one different.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)


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The fatal flaw of globalism has manifested itself. As nations become too dependent upon each other for trade, one domino falling can bring down all the rest. Has no one read the “Wealth of Nations” recently?

“Balance of Trade” means just what implies, balance. Surpluses or deficits reap negative long term consequences. History is replete with examples of societies failing for this very reason. I urge anyone interested to read Jared Diamond’s book “Collapse”. Trade is good when done wisely. However, a society must still be self sufficient. The U.S. is not. This keeps us at risk for all manner of ills.

Posted by Anubis | Report as abusive

James come on now, your acting like you’ve never heard of the Smithsonian Agreement or the Plaza Accord. By DECREE means by the stroke of a pen in one day. That day maybe on or before November 8th, 2009

Posted by GIL | Report as abusive

What’s going to happen when other governments ask our government to pay up on the money they owe? That’s when the end begins. China might ask for California as payment on the debt we owe. Our government might have to auction off states to pay down the national debt. Wouldn’t that be something!

Posted by Mufaso | Report as abusive

Investors of any country, growing or not, seek investments that return the best profit at an acceptable risk. Only now are we realizing that many US securities – the complex deriviatives – are fraught with risk. However, there remains excellent investment opportunity in technology (not computer, but all technology) companies. With innovation as the sole remaining driver of US economy, future growth will eventually slow to the rate of population growth, which is mainly immigration (which is typically a political decision).

Growing economies like China, India, and Brazil will then find that investment in their own infrastructure will yield greater returns. Let us hope that they invest in sustainable industries rather than continue to repeat the same boom-bust economic models that prior superpowers followed.

The USA, despite its high debt load, remains rich in natural resources and innovation, and will remain the global economic leader for some time to come. In order for the USA to remain viable for the long term, however, it must stop importing disposable Chinese plastic products and stop outsourcing its technologies to those whose primary purpose is to steal it.

In addition, the USA and the rest of the world would be better served by re-valuing oil in a “basket” currency. This will give China incentive to de-couple the value of the yaun from the dollar and provide a small increase in energy price stability. The USA should then pursue international fiscal policy cooperation that emphasizes stability, transparency, accountability, and fairness. The global market currency could eventually be established not just for energy trading but also for all major international trade. This would eliminate currency manipulation and promote a simpler and more equitable global trade — which would promote growing economies to buy goods again from the formerly rich industrial powers of the world.

Posted by Mike | Report as abusive

I don’t think they will be able to fix the system. It will have to crash further.

Posted by Russ | Report as abusive

So if the West stops consumption/imports and starts saving who are the current exporter nations will be exporting their goods to? How are they going to grow? Have the politicians and MSM lost their mind entirely?

This change will be happenning on boths sides. As the West deflates the East will go down with it. They may stay afloat for a few years by spending their accumulated foreign currency reserves, but that is a dead end for them.

50 years of deflation is what we are looking at now. Yoo hoo.

Posted by Sammy | Report as abusive

China is only one of approximately 140 nations who hold US Debt. That is 140 of the 195 nations of this world consider US debt to be a safe investment. We used to brag about that and use it as evidence of the strength of our economy.
Now the same fact that has existed for 60 years is used by some to slander our economic strength.
It has certainly been worse. In the 1980’s Japan owned 20% of the US stocks traded on Wall Street, while the rest of the foreign nations owned another 13%.
We survived that. And we will survive China owning an amount of US debt roughly equal to 15% of the US housing market.

Posted by Sternberg | Report as abusive

Your analysis falls short of getting to the root of the problem – an undervalued currency and massive current account surpluses. The acquisition by the Chinese of US debt is not the cause of the problem, but a symptom of an even greater one. That of continued (30 years +) current account deficits, and trade imbalances that in a Ricardian world could not exist (i.e. with fiat money, you print more and issue more debt. There is no printing press for gold). Massive deficits should be met with an outflow of capital (formerly gold) and then severe demand contraction, thereby illustrating the “natural” stabilizers to re-establish equilibrium in trade. Instead, the US prints money and the Chinese buy – it is in both of their interest to do so, until …….

Of course, if the Chinese stopped buying US debt, as you suggest, this would only mean their massive surpluses would have to be redirected elsewhere. One place for this would be in Chinese domestic PP&E – this would create a series of nasty bubbles back on the home land, to be followed by a period of painful deflation. Sound familiar? It should, it’s called “Japan” and “the lost decade”.

Ergo, the only solution is to stop allowing the gods of monetary policy to endless print money and make more money through a shaky banking system.

This thing we call the “Financial Crisis” – it’s only the first chapter. I’m not sure when the next episode is coming or how, but it will and we will point back to this period for explanations as to its roots. Remember, the period of pure fiat money (i.e. post-Bretoon Woods and no convertability to gold) is only a 40 year experiment. Thus far, I think the policy makers know far less than they believe – that makes them dangerous.

Posted by Michael | Report as abusive

Dear Editor friend,
Your article is good for world leaders and world arm chair economists and to general journalists.
I have been observing since so many months, all these world leaders used to assemble, giving their faces to photojournalists and some declaration on their deliberations.
Back to your writings,honestly saying, getting many innumerable informations from all types of media coverages,
under this circumstances China will not leave America and Vice Versa.
Entire world wants to have very strong economic and social connections with China for their own ends.
China has very huge cash reserves.
America had huge cash reserves in previous decades.
Due to Iraq and Afghanistan conflicts, America had spent huge reserves for troops movement, maintenance and to cope up with her recession problems and now for day today running economics.
These my writings are true to general public.
We can write,discuss and comment on lot of current subjects.
As per today!s world report, time has come for developed nations to go for new approaches for tackling their economic woos and for immediate solutions for preventing on future set backs.
As a general observer like me and other ordinary individuals, and like you and other reporters, let us wait and see the outcome of G20 Summit declarations on Climate change concrete steps, stable economy, and more co operation on trade and commerce.

Posted by krishnamurthi ramachandran | Report as abusive

The IMF who only spend $5 trill in the world economy says we have to a rebalance it?

The U.S. is the main cause of this crises, refused to sign the Kyoto treaty to save the environment, don’t spend a penny less and is still increasing it’s debt while already have spend $24 trill tells the world what to do?

Obama tells Germany and China, the major exporters to the U.S., that they export a lot but do not buy much back. China, Germany and Japan, should consume more, while debtors like the United States ought to boost savings and that’s exactly what the U.S. isn’t doing.

Obama expanded the Afghan war into Pakistan, sended more troops than ever in this already 8 year war and didn’t leave Iraq at all? Obama hasn’t an exit strategy out of this crises other than mindless and endless spending with infinitive money printing as result.

Obama can’t raise interest rates cause that would wreck the economy so what else can he do except for the money printing? My answer would be: “Absolutely nothing!”

Posted by Youri Carma | Report as abusive

I don’t see what the problem is: there is a very good histogram of ‘Trade balance in G20 countries’ elsewhere on the web page, barring the double counting. What constitutes ‘Asia’, does this include India and Russia ? It is not only ‘Asia’ that has these positive balances. Let’s not forget about financial and capital accounts/balances either.

Depending on contract terms, bonds mature over time, they can’t be cashed in one go. Also, a willing and able seller requires a willing and able buyer. The same applies to currencies. Interest rates will only ‘spike’ if the monetary policy committees decrees it, or if the markets becomes over-saturated with bonds.

In both cases the principles of interest rate and exchange rate parity applies. So what is the problem ?

What should happen are transfers from sovereign capital and financial accounts to see how trade accounts react. Then only can one tackle individual current accounts, which is short term, month by month to year by year.

Maybe the US balance sheet is far stronger than we think.

Posted by Casper Lab | Report as abusive

70% of America’s growth = Consumer spending………Game over….

Posted by Mr. Anderson | Report as abusive

A comment suggests there is no printing press for gold. Gold is like oil – the higher it’s price – the likelier it is that more gold will be mined because it becomes profitable to mine it. It is also an industrial metal and it’s price can be influenced by the drop in demand due to a slump in the demand for industrial goods. I believe economists would call the supply of gold “elastic”.

Gold, like any other commodity, has no intrinsic value. Even the price of diamonds is heavily manipulated by the major diamond miners like DeBeers). It has been said that if Debeers ever dumped the contents of its vaults on the market at one time – the price of diamonds would be next to nothing.

What Gold has, that currency doesn’t seem to have, is emotional or psychological value. It’s kind of like “that old time religion”. It sounds stable until you have to live with it and then remember why most of us don’t live with it anymore, for some very good reasons. And the top of the heap of good reasons is – one can never fully define what it was to begin with. Not even the people who lived with it could.

Posted by Paul Rosa | Report as abusive

There is no other treasure in this world but life. Human life is the most valuable. Currency is just an idea. A piece of paper or plastic that gives you the authority to exchange resources within specific limitations.

Money itself is worthless. It is a tool to facilitate the exchange of resources and nothing more. It has been said for thousands of years that lending money at interest is a bad idea. One should never “earn” money simply for having it. Money was only meant to serve as a platform for production on a free and organic basis.

In other words money was meant to help you get the things you need, to do the things you want to do. And that’s it. But since we charge interest for lending money, lending has become a cut throat business showing no similarity to the public service it was meant to be.

The lending of money could be used to facilitate growth. But as long as interest and profit are at the center of the venture, they will take precedence over human need and want, which is the very reason for lending in the first place.

That’s why people are getting evicted from their homes or going without health care or an education. What happens if home buyers only had to pay back the money borrowed and nothing more?

This is exactly what should happen. “Money making” should not be a business. Our government already makes our money for us. We should be using that money to create things that actually make a difference. Things like schools that actually teach our children how to think critically and freely, or biotechnology that is designed to work properly instead of being designed to fail and thus force another purchase.

Work to solve problems. Working to make money is a fools quest. We are paying for foolish mistakes right now. The headlines say it all.

Love your neighbor as yourself. Love yourself.

Posted by Benny Acosta | Report as abusive