Why global imbalances are important

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Nobody can know either the future path of the new war in the Middle East or its potential economic effects. I wrote what I can in this in column Entitled “The Economic Convions for the Israel War-Husass”, on October 31, 2023, the big question was whether the fire would extend to oil and oil transportation from the Gulf region. This region contains 48 percent of the international reserves that were proven and produced 33 percent of the world in the world in 2022. It also has a selected point on exports in the Strait of Hermoz. These facts remain. The question now is mostly about Donald Trump: Does he know how to end this war?

It is a question raised in other areas as well, especially the interaction of its trade policy and financial policy. The aim of the previous is to reduce the trade deficit, if not the judiciary. The goal of the latter is to run a huge financial deficit. These two goals are incompatible. The large external deficit means, by virtue of the definition, that the country spends more than its income. Since the American economy is working near its capabilities, with the unemployment rate in 4.2 percent onlyThere is no quick way to raise the income that still exists. Thus, reducing the external deficit will require discounts in national spending.

The clear way to do this will be with a continuous decrease in the financial deficit, through high taxes and reduce spending obligations. This would allow the Federal Reserve to reduce interest rates, which Trump welcomes. The dollar should also be weakened, which should help increase the production of trading goods and services. Therefore, regardless of the fact that Trump loves low taxes and high spending, why don’t you go to this?

The answer is that it may be worse than politically difficult. The case is shed by examining sectoral savings and investment balances American economy Since the early 1990s. It is important, to add these to zero, because local savings in addition to the net foreign savings (that is, the net capital flow) equals local investment. On average, American home and companies sectors were surplus of 3.5 and 1.6 percent of GDP, respectively, from 2008 to 2023. Until 1992 to 2007, it was close to balance. Therefore, on a clear basis, the American private sector does not need foreign savings. The pure dominant borrower in the American economy is the federal government. (See Plans.)

This analysis indicates that the benefit of the United States for continuous net capital flows is the ability to obtain a greater financial deficit and thus its public debt grows. This does not seem to be a good deal. But if the government reduces its deficit, while the external flow continues, the result may be to push the private sector to a deficit, either by stagnation in its income or an increase in its spending. Previous means stagnation. The latter means asset price bubbles. On a large scale, the tendency of large and sustainable flows of foreign capital to produce waste borrowing, stagnation, or both, is the biggest problem created.

in A recent paper on the case of Carnegie’s giftsMichael Betis and Erika Hogan focus on another negative aspect: they argue that the suppression of consumption in China and other countries leads to huge trade surpluses, etc. to a large deficit abroad. Countries that run this trade deficit, such as the United States and the United Kingdom, with the smaller manufacturing sectors of those that have surpluses. but, Paul Crowgman arguesEven eliminating the American trade deficit will only increase the value of manufacturing in the United States by 2.5 percentage points for GDP. Commercial imbalances themselves are not very important.

Pettis and Hogan also explains that the volume of the manufacturing sector is related to the level of savings. But the difference between the shares of the Chinese and the United States of the United States for manufacturing in GDP between 2012 and 2022 is 17 degrees Celsius (28 percent in China to 11 percent in the United States). This is much larger than the gap between the commercial balances concerned. The interpretation should lie with the formation of the request. Investment that creates high savings financing is heavier on manufactured goods compared to consumption.

In short, the main cause of anxiety about global trade imbalances is not the influence of manufacturing, which, for a country like the United States, represents a second degree issue, but on financial stability. This is also why financial amendment should be a cooperative project when participants are large economies. Americans who focus on financial deficit alone ignore its impact on global demand.

The United States is likely to fail to reduce its external deficit as soon as the tariffs are raised, unless protection is determined at completely exorbitant levels. Otherwise, the customs tariff only transforms the formation of production, from exports to import alternatives, with a little effect on the commercial balance. However, if it tries, instead, to close its external deficit by eliminating its financial deficit, it may generate a major economic slowdown.

The United States is not a small country: it must take into account global repercussions. If you want to accelerate a global discussion about the imbalances with politics, it will not be clear, but a tax on capital flows. This would target excessive foreign lending, although the entity that needs to open itself is the American government.

This, if launched, may lead to a global discussion of the type that has been discussed in a studied paper Richard Samanz for Brookings Foundation. It indicates that the discussion must focus on financial, monetary, development and international trade policies. This is logical. But it also assumes a smart and cooperative approach to politics. This seems unlikely.

Science can launch a global discussion stick. But this is what follows the threats of interest.

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This article has been updated to clarify a sentence on manufactured goods