Goodbye Global Imbalances?

In an article A Requiem for Global Imbalances for Project Syndicate, Barry Eichengreen writes as if global imbalances are a thing of the past and international trade in one less thing to worry about for the world economy.

This follows some articles a few months back charting Euro Area current account balances which claimed Euro Area imbalances are a thing of the past!

That silly economist intuition!

Balance-of-payments problems show themselves in two ways. One is a a financial crisis in the external sector which can lead to exceptional financing transactions by the government such as by borrowing from the IMF followed by deflationary measures imposed. The other way is by preventing nations from achieving the potential output because an expansionary fiscal and monetary policy will lead to potential balance-of-payments problems.

The reduction of the U.S. trade deficits among other things is also a result of the deflationary fiscal policy adopted which has kept domestic demand low and resulting in lower imports than otherwise.

Nicky Kaldor’s footnotes are always interesting. In a 1980 article The Foundations Of Free Trade Theory And Their Implications For The Current World Recession (published in Collected Essays Vol. 9) critiquing free trade and free trade theory, Kaldor writes:

… But apart from such cases (which account for only a fraction of the imbalances of trade between industrialised countries) the existence of surpluses and deficits in the intra-trade of the developed industrialised countries is evidence of an asymmetrical relationship—some countries tend to export more (at the prevailing level of production and employment) than they wish to import, whereas others suffer from the insufficiency of exports relative to their import propensity which prevents them from utilising their own production potential fully. The evidence for this consists of overall surpluses and deficits in foreign trade of the various industrial countries which are of chronic nature—which tend to persist year after year despite variations in relative costs, exchange rates, etc.

The footnote to this has a great insight:

Morever, the actual surpluses and deficits are not a proper measure of the potential size of such imbalances (and of the deflationary force they exert) since the countries who suffer from an excessive import propensity tend, on that account, to suffer from an insufficiency of domestic demand as well so their aggregate output or income is demand-constrained; they may, in addition be forced to follow a deflationary fiscal and monetary policy, and for both of these reasons, will import less from the surplus countries than they would do under full employment conditions.

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