An Explanation Of Ongoing Global Imbalances: A Story Of The Market

The U.S. current account deficit and the Chinese current account surplus have dominated both the news and much of the research in international macroeconomics in the recent past. However, the whole story is far beyond these. Most advanced economies and emerging markets, including Euro area, Japan, East Asia, and oil exporters, are all more or less involved. To caricature, there are roughly two views as of the ongoing situation. The first and more prevalent view is a gloomy view. It is said that, the sizes of ongoing imbalances are too large to be sustainable; the doomed reversal is looming; and government intervention is desirable. In contrast, the second view look things in a more benign way. It is argued that, to the extent that ongoing imbalances are primarily market-driven, it is not such a real problem; and there are no reasons for government to intervene. The purpose of this paper is to test which view is more relevant in logic. I ask the following questions: What are the main characteristics of ongoing imbalances? How does the status quo come into being? How will it evolve? Through which channels should it be alleviated? I conclude that, the increasingly deepened globalization indeed plays a prominent role in shaping ongoing imbalances, the reasonability could be justified by existence itself, and, without unwinding the underlying fundamentals, the status quo will last for a quiet long period. As regard to international monetary system, although the revived Bretton Woods System does exacerbate the ongoing patterns of imbalances, it is not so relevant in the first place and will phase out much quicker than its precedent. The analysis also implies that, perhaps the real exchange rate problems are not as important as media and consensus have suggested. Moreover, international growth realignment does help solve global imbalances, but only to a limited degree. And lastly, domestic policies aiming at reducing market distortions may lead to a more favorable external balance, but only as a by-product at most.