Transcript Global Imbalances and their Role in the Global Financial Crisis

Global Imbalances and
their Role in the Global
Financial Crisis
By John J. Maughan
Global Imbalances - Current Accounts
Obstfeld & Rogoff 2010
Global Imbalances - History
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Spanish gold and silver hoarding – chronic deficits
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British silver drain in Far East – gunboat diplomacy
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Interwar gold standard
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German balance of payments
Piecemeal devalations in 1930s
Global Imbalances – Me Bad?
“Good”imbalances
High savings for education, social security, etc.
High investment due to real productivity increases
High portfolio investment through deep and liquid
financial markets
“Bad” imbalances
Domestic market distortions – high and low savings
Systemic distortions – global large surpluses, reserves
Global Imbalances and Crisis
Three ways imbalances could be bad news:
1.
“Disruptive adjustment” or protectionism
2.
Product of common causes
3.
Global liquidity imbalances
Global financial crisis shifted concern to implications of
global imbalances
Up to the Crisis: 1995-2003
Asian financial crisis -> trade surpluses, high savings,
large dollar reserves
US dot-com boom -> domestic and foreign investment,
lower US savings, stronger dollar, equity gains
Commodity price boom -> higher US deficit
US dot-com bust -> monetary loosening, falling interest
rates (real and policy)
Rising real estate values -> shift from equity to real
estate after dot-com bust, US savings do not increase
Up to the Crisis: 2004-2008
A “new and more dangerous phase.” Four factors:
Commodity price boom -> higher US trade deficit
US expansionary monetary policy -> low policy interest
rates, low inflation, high liquidity, cheap credit
China’s rise -> low inflation on goods, high savings,
dollar reserves, finance cheap US credit
US financial innovation -> cheap and easy US credit,
EU demand, inflated housing prices
Commodity Price Boom
Obstfeld & Rogoff 2010
Cheap Credit in the US of A
Obstfeld & Rogoff 2010
Cheap Credit in the US of A
Obstfeld & Rogoff 2010
China’s Rise - Trade Surplus
Obstfeld & Rogoff 2010
China’s Rise - Reserves
Obstfeld & Rogoff 2010
US Financial Innovation
Obstfeld & Rogoff 2010
Key Causal Factors 1-5
Low global real interest rates. Effect: lower US interest rates.
Low inflation. Effect: lower US interest rates, higher credit
availability, more spending on real estate.
Low US interest rates (both policy and real). Effect: inflated
leverage and housing bubbles.
Rising US housing values, uninterrupted by Asian financial crisis
or dot-com bust. Effect: entrenched expectations of housing
appreciation, inflated housing bubble.
US dollar. Effect: upward pressures lead to cheaper foreign
borrowing and expansionary monetary policy (to reduce current
account deficit).
Key Causal Factor 6-10
China et al. high savings. Effect: lower global real interest rates.
(High savings rate fuelled primarily by young and old for housing
and social security, respectively. See Chamon et al. 2011.)
China et al. trade surpluses. Effect: higher dollar reserves.
China & Asia incoming FDI. Effect: higher dollar reserves.
Deflation in Japan. Effect: more expansionary monetary policy to
combat low inflation.
High commodity prices. Effect: increased global savings, larger
global trade surplus, greater US deficit, and higher dollar reserves.
Key Blame Factors 1-4
US expansionary monetary policy. Effect: lower US interest
rates.
US poor financial regulation. Effect: higher US housing
values, inflated leverage and housing bubbles.
US politics. Effect: postpone tough policy decision to reduce
fiscal deficit, lower foreign borrowing, and rebalance trade.
China politics. Effect: postpone tough policy decision to
rebalance economy by appreciating currency, reducing
reserves, and relying more on domestic demand for growth.
Key Blame Factors 5-7
China et al. dollar pegs or managed floats. Effect:
larger trade surpluses.
China et al. dollar reserves. Effect: stronger US dollar,
leading to both cheaper foreign borrowing and
decreased US terms of trade, which in turn leads to
further monetary loosening.
EU regulatory arbitrage. Effect: increased demand for
US structured investments.
Policy Recommendations
US should increase private and public saving – former
has largely been achieved.
China et al. should attempt to reduce their savings
rates by relying more on domestic demand and
providing social services.
Will greatly reduce global imbalances, but will be
politically painful.