Everyone is working hard to increase global trade imbalances
Michael Pettis, Dec 31, 2008 (excerpts)
South Korea posted a current-account surplus for a second consecutive
month in November, which may help ease pressure on the won, the region's
worst-performing currency this year. The surplus was $2.06 billion,
compared with $1.67 billion in November 2007, the Bank of Korea said…The
nation posted a record $4.75 billion excess in October.
Vietnam devalued the dong by 3 per cent on Thursday in its latest
attempt to keep its export-dependent economy afloat. The government said
that 2008 economic growth had shrunk to 6.23 per cent from 8.5 per cent
last year and there were signs it was likely to slow further in 2009.
Several analysts have warned of the threats of competitive devaluations
among Asia's exporting economies but Hanoi's move comes after spending
most of the year trying to maintain the currency's strength to slow
spiralling inflation.
Several analysts noted that while governments have resisted pressure for
protectionist policies, there are fears they might take the short cut of
devaluation. Thailand and Taiwan have recently become net purchasers of
dollars, provoking the Asian Development Bank to warn against
“unnecessary and excessive interventions in the currency markets,
especially to depreciate domestic currencies”.
One consequence of the financial crisis will inevitably be capital
outflows from developing countries. The necessary corollary of capital
outflows is trade surpluses. Without running a trade surplus no country
can consistently support capital outflows, and as obvious as this is, it
also seems to be a source of tremendous mystery to many experts and
policymakers. Keynes for example pointed this out in his fury at the way
Germany was required to post war reparations in the 1920s while its
ability to generate export surpluses was all but eliminated by the
victorious powers. Capital exports by definition require trade surpluses.
This is just another way of saying that a lot of developing countries
that had been running trade deficits will soon be, if they aren't
already, running trade surpluses. Instead of contributing their net
demand to the world economy, as they had via their trade deficits, they
will now be contributing their net supply.
This will not help the world imbalances. The biggest contributors of net
demand are the US and non-Germany Europe, and both of these regions are
seeing a rapid decline in their net demand contribution (i.e. their
trade deficits are expected to shrink). To adjust to this decline the
world needs new sources of net demand or else global production must
contract sharply via factory closings and rising unemployment. But the
largest net supply country, China, is increasing its export of net
supply (its trade surplus has been rising) while several trade deficit
countries in Asian and elsewhere are switching to trade surplus or
otherwise trying to reduce their deficits.
This cannot be sustainable. We cannot expect production to rise while
consumption declines except if it comes with a dangerous rise in forced
investment (also known as inventory). The crisis cannot even begin to be
considered in its final stages until this issue is resolved.
...
Full item at
http://www.rgemonitor.com/asia-monitor/254920/everyone_is_working_hard_to_increase_global_trade_imbalances
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