The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy

The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy

Michael Pettis

Language: English

Pages: 0

ISBN: 1491531339

Format: PDF / Kindle (mobi) / ePub

China's economic growth is sputtering, the Euro is under threat, and the United States is combating serious trade disadvantages. Another Great Depression? Not quite. Noted economist and China expert Michael Pettis argues instead that we are undergoing a critical rebalancing of the world economies. Debunking popular misconceptions, Pettis shows that severe trade imbalances spurred on the recent financial crisis and were the result of unfortunate policies that distorted the savings and consumption patterns of certain nations. Pettis examines the reasons behind these destabilizing policies, and he predicts severe economic dislocations―a lost decade for China, the breaking of the Euro, and a receding of the U.S. dollar―that will have long-lasting effects.

Pettis explains how China has maintained massive―but unsustainable―investment growth by artificially lowering the cost of capital. He discusses how Germany is endangering the Euro by favoring its own development at the expense of its neighbors. And he looks at how the U.S. dollar's role as the world's reserve currency burdens America's economy. Although various imbalances may seem unrelated, Pettis shows that all of them―including the U.S. consumption binge, surging debt in Europe, China's investment orgy, Japan's long stagnation, and the commodity boom in Latin America―are closely tied together, and that it will be impossible to resolve any issue without forcing a resolution for all.

Demonstrating how economic policies can carry negative repercussions the world over, The Great Rebalancing sheds urgent light on our globally linked economic future.

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productivity has grown faster in China than in the United States, so the renminbi would have to rise by that differential—several percent annually—just to maintain its real relative value. But a grosser mistake is to assume that the impact of the currency revaluation cannot be undermined by an expansion of credit at repressed interest rates, or by a reduction in real interest rates. In fact both happened in China after 2005, and their cumulative impact overwhelmed any change in the real value of

accusation, the anger misses the point. In fact all creditors, even official creditors, behave more or less in the same way—simply note the unseemly fight among official creditors during the Greek restructuring in early 2012, each of which demanded seniority and tried to exempt itself from accepting a write-down.1 2. But unfortunately it doesn’t stop with just the behavior of creditors and speculators. Ordinary households, for example, also must react. They know that throughout history fiscal

Delano Roosevelt in 1932 as the Republican position: A puzzled, somewhat skeptical Alice asked the Republican leadership some simple questions: “Will not the printing and selling of more stocks and bonds, the building of new plants and the increase of efficiency produce more goods than we can buy?” “No,” shouted Humpty Dumpty, “the more we produce the more we can buy.” “What if we produce a surplus?” “Oh, we can sell it to foreign consumers.” “How can the foreigners pay for it?” “Why, we

the process easier given that, as I will argue in point 7 below, it is the household sector that is usually on the hook for cleaning up banking crises. 3. Without a strong form of fiscal union or a reversal of German trade surpluses, much of peripheral Europe will be forced to abandon the euro and to restructure its debt. The problem facing Spain, Portugal, Italy, Greece, Ireland, and the rest of peripheral Europe is not lack of liquidity but rather a lack of competitivity caused by the huge

“Bogus Arguments for RMB Revaluation,” November 27, 2009, 4. At the time of this writing, total central bank reserves at the People’s Bank of China stood at roughly $3.2 trillion. 5. This seemingly surprising statement is actually widely accepted by China-based economists. And why not? As of this writing the renminbi has revalued by roughly 30 percent since July 2005, which means that the value of its local currency liabilities has gone up by 30 percent relative to value of its

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