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The Great Rebalancing

The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy

Copyright Date: 2013
Pages: 216
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  • Book Info
    The Great Rebalancing
    Book Description:

    China's economic growth is sputtering, the Euro is under threat, and the United States is combating serious trade disadvantages. Another Great Depression? Not quite. Noted economist and China expert Michael Pettis argues instead that we are undergoing a critical rebalancing of the world economies. Debunking popular misconceptions, Pettis shows that severe trade imbalances spurred on the recent financial crisis and were the result of unfortunate policies that distorted the savings and consumption patterns of certain nations. Pettis examines the reasons behind these destabilizing policies, and he predicts severe economic dislocations--a lost decade for China, the breaking of the Euro, and a receding of the U.S. dollar--that will have long-lasting effects.

    Pettis explains how China has maintained massive--but unsustainable--investment growth by artificially lowering the cost of capital. He discusses how Germany is endangering the Euro by favoring its own development at the expense of its neighbors. And he looks at how the U.S. dollar's role as the world's reserve currency burdens America's economy. Although various imbalances may seem unrelated, Pettis shows that all of them--including the U.S. consumption binge, surging debt in Europe, China's investment orgy, Japan's long stagnation, and the commodity boom in Latin America--are closely tied together, and that it will be impossible to resolve any issue without forcing a resolution for all.

    Demonstrating how economic policies can carry negative repercussions the world over,The Great Rebalancingsheds urgent light on our globally linked economic future.

    eISBN: 978-1-4008-4662-7
    Subjects: Economics, Political Science

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-xii)
  3. CHAPTER ONE Trade Imbalances and the Global Financial Crisis
    (pp. 1-25)

    Ever since the U.S. subprime crisis began in 2007–8, caused in large part by an uncontrolled real estate boom and consumption binge, fueled in both cases by overly abundant capital and low interest rates, the world has been struggling with a series of deep and seemingly unrelated financial and economic crises. The most notable of these is the crisis affecting Europe, which deepened spectacularly in 2010–11.

    For reasons we will see in chapter 6, Europe’s crisis will probably lead to a partial breakup of the euro as well as to defaults or debt restructurings among one or more...

  4. CHAPTER TWO How Does Trade Intervention Work?
    (pp. 26-46)

    What is trade intervention, or more specifically, what are the policies and institutional constraints that affect exports, imports, and the trade surplus? Most analysts will readily recognize that there are a number of explicit interventionist policies aimed at affecting trade and the trade balance. Import tariffs, as everyone knows, are an important form of trade intervention. When a country places tariffs on its imports of foreign goods and services, it tends to reduce foreign imports overall and so causes that country’s trade deficit to decline or its trade surplus to rise.

    It may seem obvious why this would occur. Tariffs...

  5. CHAPTER THREE The Many Forms of Trade Intervention
    (pp. 47-68)

    As the discussion of the social safety net in the previous chapter suggests, once we fully understand the mechanism by which obvious forms of trade intervention, like currency manipulation or import tariffs, actually affect the trade balance, it will become clear that there is a wide variety of policies and institutional structures that can have significant impacts on the trade balance, even when they may at first seem unrelated to trade. Anything that affects the gap between savings and investment, it turns out, must automatically affect the trade balance.

    Of course this also means that because anything that affects the...

  6. CHAPTER FOUR The Case of Unbalanced Growth in China
    (pp. 69-99)

    So far we have been discussing the factors that affect trade balances in fairly abstract terms, so it might be useful to look at a specific case of a country with a number of policies in place that force up the national savings rate and, with it, a trade surplus. China, as is well known, has in the past decade experienced the largest trade surplus in the word, and as a share of global GDP its trade surplus may be the highest—or certainly among the highest—ever generated in history.

    But China also has an extraordinarily high investment rate,...

  7. CHAPTER FIVE The Other Side of the Imbalances
    (pp. 100-118)

    Let us leave the Chinese rebalancing and return to a more abstract discussion of trade imbalances. We are often told that countries that run large trade deficits do so because local households save too little. This, so the argument goes, is usually because of moral weaknesses or local cultural preferences that encourage lazy work habits and spendthrift ways, at either the private level or the public level, and often both.

    The only thing that can correct a country’s trade deficit, according to this view, is a return to old-fashioned virtues. If countries with large trade deficits only learned to save...

  8. CHAPTER SIX The Case of Europe
    (pp. 119-135)

    In chapter 5 I argued that policy or institutional distortions in one country that affected its savings rates would also affect savings, but in the opposite way, in other countries. This is a very important point, and it is worth repeating. To say that a country runs a trade deficit because its citizens are spendthrift and save too little is meaningless—although perhaps permitting a frisson of moral smugness—and indicates only how little many analysts understand the global balance of payments mechanism.

    One of the clearest ways to see how distortions in consumption in one country can cause distorted...

  9. CHAPTER SEVEN Foreign Capital, Go Home!
    (pp. 136-149)

    One of the biggest worries that periodically sweep the international markets is the fear that countries like China, which buy huge amounts of U.S. Treasury bonds, will stop buying U.S. government bonds—perhaps as a way of expressing concern over U.S. creditworthiness or displeasure with U.S. foreign and trade policies. If China stops buying U.S. government bonds, so the argument goes, the U.S. government will be unable to finance itself except with much higher interest rates and much slower growth—perhaps even devolving into crisis.

    For example in his February 17, 2009, testimony to Congress, Yale professor and former Morgan...

  10. CHAPTER EIGHT The Exorbitant Burden
    (pp. 150-177)

    In the classic Marxist view, crises, according to David Harvey, “are, in effect, not only inevitable but also necessary, since this is the only way in which balance can be restored and the international contradictions of capitalist accumulation be at least temporarily resolved.” He continued,

    Crises are, as it were, the irrational rationalisers of an always unstable capitalism. During a crisis, such as the one we are now in, it is always important to keep this fact in mind. We have to ask: what is it that is being rationalized here and what directions are the rationalisations taking, since these...

  11. CHAPTER NINE When Will the Global Crisis End?
    (pp. 178-196)

    In this book I have tried to put together as logically as possible a number of points, often counterintuitive, that follow from the standard balance of payments and macroeconomic accounting identities. Accounting identities are true by definition, of course, and cannot plausibly be disputed, so to the extent these points follow logically, they must be valid. To summarize,

    1. A country’s savings level is not only or even primarily a function of domestic cultural and personal preferences. Savings rates, especially in countries with abnormally high or low levels of savings, are almost always determined by policies and institutional constraints that...

  12. NOTES
    (pp. 197-204)
  13. INDEX
    (pp. 205-220)