Global Imbalances: The Best of All Possible Worlds

Since 2000, a number of economists have commented on the existence of a global imbalance in capital flows, these flows have manifested themselves in terms of a trade deficit between the United States and China, an allocation of Chinese growth toward capital related growth. The policy prescription that these writers have presented have been to boost domestic demand in China, with an aim to reducing the trade deficit.

This paper questions some of the underlying assumptions of this economic model and brings forth for consideration the possibility that given the constraints of the world economic system, that the state of current imbalance may be in fact the best of possible worlds.

The Chinese economy should be demand driven

First there is the assertion that the Chinese savings rate is too high and that China would be better off encouraging a boost in demand rather than a boost in capital spending.

• • • Neglects the role of aging society ****

Chinese capital spending is too high

• • • Neglects that China is a developing nation ***
    • Neglects that China's aging population ***

China should not be funding the United States

• • • Neglects development of efficent markets in the United States ***
    • Neglects foreign policy benefits of funding the United States ***

This is not sustainable

In arguing that the Chinese economy is inbalanced often reference is made to the rule that anything that cannot continue indefinitely will not continue indefinitely.

Inflation

Productivity will cure inflation.