The theory of global imbalances: mainstream economics vs. structural Keynesianism

By Tom Palley

Prior to the 2008 financial crisis there was much debate about global trade imbalances. Prima facie, the imbalances seem a significant problem. However, acknowledging that would question mainstream economics’ celebratory stance toward globalization. That tension prompted an array of explanations which explained the imbalances while retaining the claim that globalization is economically beneficial. This paper surveys those new theories. It contrasts them with the structural Keynesian explanation that views the imbalances as an inevitable consequence of neoliberal globalization. The paper also describes how globalization created a political economy that supported the system despite its proclivity to generate trade imbalances.

Read more here.

McKinnon and Wolf on global imbalances and Chinese liberalization

This is a bit old. It was published earlier this month in the Financial Times, as a response to Wolf's column. McKinnon is a well-known exchange rate specialist, and one of the few that has, correctly in my judgment, not been overly concerned with the international role of the dollar for the last three decades. His concern with Chinese liberalization of financial markets is that it would lead to inflows, since interest rates in the developed world are too low, and instead of balancing the trade surpluses, it would lead to more accumulation of reserves. The implicit notion is that if rates of interest were higher abroad, and Chinese funds flowed abroad it would be okay to liberalize, one supposes.

Note that this is also what Martin Wolf suggested in the original column (subscription required). In his words: "In the long run China’s capital account will presumably become largely open and in time, no doubt, China’s savers will own large parts of the world." In other words, the idea is that Chinese funds would finance the over spending in the rest of the world, and help in dealing with global imbalances, and Chinese savers would invest in real assets abroad. In contrast, if inflows were added to the trade surpluses, the Chinese would add to the 'problem' of the global imbalances.

Note that this view goes hand in hand with the notion that the accumulation of reserves is intrinsically bad. Wolf says:

"The principal form of capital outflow has been the accumulation of foreign currency reserves by the government. At $3.8tn last December (almost $3,000 for each Chinese person), these are gigantic and extremely unrewarding. It would be far better if some of this were converted into real assets."

Don't get me wrong, China holds more reserves than it needs for avoiding a currency crisis, or any sort of balance of payments problem that might arise (in a very distant future). Yet, the notion that China could open the capital account and not get into the kinds of problems that all the countries that liberalized financial markets did seems excessively optimistic.

There is essentially no problem if China maintains a trade surplus and attracts capital flows, increasing their reserves. And that has no relation to the financing of their investment, or the transition to a more consumer oriented economy. As I said a while ago global rebalancing is one of the myths of the current crisis. If the US grows faster, say as the result of an improbable fiscal expansion, the imbalances would grow larger, and that would be good.

I hope that China doesn't open the capital account, but that has nothing to do with the global imbalances, and all to do with the problems of financial liberalization.

In the long run China’s capital account will presumably become largely open and in time, no doubt, China’s savers will own large parts of the world. - See more at: http://magazine.thenews.com.pk/mag/moneymatter_detail.asp?id=7688&catId=194#sthash.fw6I8fiF.dpuf

Tokunaga & Epstein - Endogenous Finance of a Dollar-Based World-System: A Minskian Approach

Junji Tokunaga & Gerald Epstein 

From the Abstract:

Global financing patterns have been at the center of debates on the global financial crisis in recent years. The global imbalance view, a prominent hypothesis, attributes the financial crisis to excess saving over investment in emerging market countries which have run current account surplus since the end of the 1990s. The excess saving flowed into advanced countries running current account deficits, particularly the U.S., thus depressing long-term interest rates and fuelling a credit boom there in the 2000s. According to this view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which was the epicenter of the financial crisis. Instead, we argue that a key cause of the global financial crisis was the dynamic expansion of balance sheets at large complex financial institutions (LCFIs)(Borio and Disyatat [2011] and Shin [2012]), driven by the endogenously elastic finance of global dollar funding in the global shadow banking system. The endogenously elastic finance of the global dollar contributed to the buildup of global financial fragility that led to the global financial crisis. Importantly, the supreme position of U.S. dollar as debt- financing currency, underpinned by the dominant role of the dollar in the development of new financial innovations and instruments, and was a driving force in this endogenously dynamic and ultimately destructive process.

Read rest here 

Akyüz on the Global Crisis and Trade Imbalances

Yilmaz Akyüz, ex head of the macroeconomic and development division at UNCTAD, and chief economist at the South Centre has a new post on global imbalances. He says:

International trade has been the single most important channel of transmission of contractionary impulses from the financial crisis and recession in the US and the EU. After growing at an average rate of some 7 per cent per annum, the volume of imports by Advanced Economies (AEs) first decelerated sharply in 2008 and then fell by 12 per cent in 2009, largely because of the decline in imports by the US. It bounced back in 2010 due to a broad-based recovery, but lost momentum as Europe went into tailspin. Growth of total volume of imports by AEs barely reached 1 per cent in 2012. In order to avoid a sharp deceleration of growth, Developing Countries (DCs) have had to rely on their own markets or South-South trade. In fact, given the widespread economic downturn in AEs, the latter have also sought expansion in developing country markets in order to kick-start recovery.

Read the rest here.

A New Medievalism?

Among many Kantians, an argument is supported which suggests the post-Cold War global landscape presents an historical juncture that predisposes a profound challenge to conventional wisdom of how to approach the global political economy. The modern geopolitical landscape is evident of a high degree of transnationalism and fragmentation; there is an empirical trend towards sophisticated cultural integration. Hence, it is suggested that in order to apprehend the current nature of the social world, it is wise to conceive the international landscape as form of a 'new medievalism' (cf. Bull, 1977), representing a network of overlapping authority and multiple loyalties held together by various universalised claims. Transnationalism signifies a dynamic multi-layer system in which national state autonomy is elusive and authority is more-or-less an embodiment of superstructural entities, e.g the EU. Nation-states as organizational units of social closure that represent socially determined 'legitimate' use of political action in the international realm are, it is purported, dwindling.

One is left with some questions: what exactly is driving the perceived cultural integration ensuing the proliferation of supranational cleavages? does it have to do with identity politics? if so, why are identity politics suddenly now pertinent?  Could it be that the overarching neoliberal perspective, which essentially governs the current functioning of the capitalist world-system, is intricately altering the political domain in a dialectical sense of motion and contradiction?  Substantive explanatory answers to such questions will only develop if one is aware of the need to “exercise aggressive [...] critique not only against the conscious defenders of the status quo but also against [those that embrace, and practice,] distracting, conformist [...] tendencies (Horkheimer [1937] 2007, p. 355).  Social thought and enquiry are, after all, meant to untangle social consciousness “in waking from its dream about itself, in explaining to it the [actual] meaning of its [prescribed social] actions” (Marx 1978, p. 13).

Always hopeful for signs of intelligent life



And usually disappointed. However, I awoke early, and before my brain was adequately caffeinated, stumbled into a place I wouldn't normally venture (h/t Mark Thoma). And, wonder of wonders, found, ummm, maybe embers of economic intelligence.

The source may not surprise the less cynical reading this, but it certainly surprised me: Bill Dudley, President of the Federal Reserve Bank of New York, owner of open market operations, and permanent member of the FOMC. Bill addressed the Foreign Policy Association, and his text is worth reading.

Especially the section about half way down, where he clearly explains the policy implications of (but doesn't attribute) Wynne Godley's triple balance stock flow consistent approach.

And he understands the challenges of rebalancing the world economy.

He doesn't spend quality time on debt sustainability, caving to the current austerian meme for the most part, and thus does not tackle the unemployment equilibrium/deficient effective aggregate demand problem in the U.S. and other developed economies, which is the dog that will increasingly wag the fiscal and financial tail.

But it seems to me there are signs of intelligent embers here. Spoken in public. Will it matter?