Rebalance or else, IMF says
The International Monetary Fund has been warning for years about the risk of global imbalances — namely huge U.S. current account deficits and surpluses in China. Today its chief economist offered a grim view of how the economy might suffer if the rebalancing act fails.
Olivier Blanchard says unless the United States can refocus its economy more toward exports and China more toward imports, the U.S. recovery will probably be anemic because American consumers aren’t going to quickly revert back to their pre-crisis free-spending ways.
And if the recovery is anemic, there will no doubt be intense political pressure for more stimulus, particular in 2010 when most members of Congress face re-election.
“Were that to happen, one can imagine various scenarios: political pressure may be resisted, the fiscal stimulus phased out, and the U.S. recovery would then be very slow. Or fiscal deficits might be maintained for too long, leading to issues of debt sustainability, worries about U.S. government bonds and the dollar, and causing large capital flows from the United States. Dollar depreciation may take place, but in a disorderly fashion, leading to another episode of instability and high uncertainty, which could itself derail the recovery,” Blanchard wrote in an article released by the IMF.
Blanchard builds a case for rebalancing being in everyone’s best interest, including China’s. What’s your take? Will China and the United States get this right?