Balancing Act (Part 1)

Why are global imbalances growing?

Over the past 20 years, global imbalances—mostly Chinese savings funding US deficits—have been growing. Indeed, from 1990 to 2008 (the recent peak) imbalances increased from 1% to almost 5% of the global economy. Why is this?

Partly this reflects increased trade. As China becomes integrated into the world economy, their exports generate sizable surpluses. Investing that money into US Treasury Notes and Mortgage Backed bonds seem a safe, liquid place to put the cash to work.

The problem doesn’t lie in the imbalance so much as what happens when it reverses. That is, what if Americans stop buying cheap Chinese goods. Then slowing demand for Chinese exports would reduce their need to import German machinery, which would in turn reduce Germany’s ability to support Greece’s structural adjustment. Sudden rebalancing could be disruptive to the global economy.

We’ve seen this movie before. After World War I France was a systemically important player on the global stage with an undervalued currency and chronic surpluses. By 1928, France held 20% of the world’s excess reserves, but in a few years both England and the US devalued their currencies. The French lost billions. Only massive government spending kept them out of the Depression.

The lesson is, running large surpluses can be risky. But not as risky as deficits. At least surplus countries can spend their savings.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T19:59:24+00:00 August 1st, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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