Those pesky global imbalances
Joseph Stiglitz takes on the matter of global imbalances with some thoughts on how they might be resolved. I confess to be perplexed by the persistence of these imbalances, as someone who was concerned about their potentially destabilizing impact a few year ago. But then again I called the stock market bubble back in 1997. Events have a way of perpetuating themselves for longer than most economists think possible.
The big danger in 2007 is that the tanking housing market starts to undo these imbalances in a disorderly manner. Let’s hope not, but how can China continue to build up its reserves of US dollars? Minimally, you might expect them to start pouring money into real assets in the US, primarily real estate and stocks, and therefore take more of a direct ownership stake in the US economy. Gee, I wonder how that might go over?
Anyway, enough musings from me. Here’s the Nobel laureate:
THE International Monetary Fund meeting in Singapore last month came at a time of increasing worry about the sustainability of global financial imbalances: For how long can the global economy endure Americaâ€™s enormous trade deficits â€” the United States borrows close to $3 billion a day â€” or Chinaâ€™s growing trade surplus of almost $500 million a day?
These imbalances simply canâ€™t go on forever. The good news is that there is a growing consensus to this effect. The bad news is that no country believes its policies are to blame. The United States points its finger at Chinaâ€™s undervalued currency, while the rest of the world singles out the huge American fiscal and trade deficits.
To its credit, the International Monetary Fund has started to focus on this issue after 15 years of preoccupation with development and transition. Regrettably, however, the fundâ€™s approach has been to monitor every countryâ€™s economic policies, a strategy that risks addressing symptoms without confronting the larger systemic problem.
Treating the symptoms could actually make matters worse, at least in the short run. Take, for instance, the question of Chinaâ€™s undervalued exchange rate and the countryâ€™s resulting surplus, which the United States Treasury suggests is at the core of the problem. Even if China strengthened its yuan relative to the dollar and eliminated its $114 billion a year trade surplus with the United States, and even if that immediately translated into a reduction in the American multilateral trade deficit, the United States would still be borrowing more than $2 billion a day: an improvement, but hardly a solution.
… Underlying the current imbalances are fundamental structural problems with the global reserve system. John Maynard Keynes called attention to these problems three-quarters of a century ago. His ideas on how to reform the global monetary system, including creating a new reserve system based on a new international currency, can, with a little work, be adapted to todayâ€™s economy. Until we attack the structural problems, the world is likely to continue to be plagued by imbalances that threaten the financial stability and economic well-being of us all.Joseph E. Stiglitz, a professor of economics at Columbia and the author, most recently, of â€œMaking Globalization Work,â€ was awarded the Nobel in economic science in 2001.