Balancing Act (Part 2)

So why are global imbalances a problem?

After all, no one worries about what states are trading with others inside the US. If global imbalances come from increased trade, they’re just the natural result of differing savings rates and different investment opportunities among trading partners.

But the problem with imbalances isn’t what they are but what they lead to. In the ‘70s we had a persistent and growing imbalance with Germany and Japan and it led to a global monetary crisis, currency devaluation, and runaway inflation. In the late ‘80s Japan ran a much larger surplus than China ever did and we established trade quotas and encouraged easy monetary policy over there. The result was higher inflation in the US and a bubble economy in Japan. In part Japan is still dealing with the crash that followed their late-‘80s boom.

How can we avoid a repeat? The first step to a solution is recognizing the problem. The G-20 has committed itself to a more balanced economy. Such a world has important implications: US consumption cannot be the engine that pulls ever-increasing Chinese exports along. It’s unclear what will drive trade growth in the future, but cash-rich developing countries like China, Brazil, India, and Indonesia should. They need to invest in their own infrastructure. Then their consumer economies can expand.

But this requires political and moral leadership, both over there and over here. Protectionism doesn’t save jobs, it costs them. Wealthier trading partners want our goods. Protectionism subsidizes inefficient industries and penalizes competitive ones.

The growth of global trade is a balanced way out of our imbalances. But it bears watching.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T19:59:54+00:00 August 2nd, 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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