Unbalanced policy-making

G20: Barack Obama and Gordon Brown see the G20 summit as a chance to sort out global economic imbalances. What could be easier? China could nudge its currency up a bit and consume more. Germany and Japan could also consume a little extra, while the US and UK could go the other way.

But China doesn’t want to play ball. And Obama and Brown have been doing everything possible to sustain consumer spending in the US and UK. The reality is that global imbalances reflect each nation’s attempts to avert recession. They are simply not going to be legislated away.

 

Global imbalances are made by naughty nations that want to have it all. The US and UK have lived beyond their means for years. Asia has helped: money saved by relatively poor, risk-averse Asians has long flowed into the big Anglo-Saxon economies. The Chinese and Japanese are the biggest holders of US government debt.

Until crisis was unleashed a couple of years ago the system seemed to suit everyone. China’s exports grew at staggering rates and its economy by 10 per cent per annum. It kept — and has continued to keep — its currency, the renminbi, cheap, to favour export growth. The idea was to concentrate production and employment in this hugely populated, largely poor country, and provide jobs for the millions of peasants desperate for work.

Brown seems to think that Asian nations run up bigger and bigger foreign exchange reserves out of a fear of global crisis. A further bolstering of the International Monetary Fund might lead them to change their ways.

But China and other Asian nations have surpluses and growing foreign exchange reserves not out of fear of crisis, but because they want export-led growth. They are unlikely to change their policies. China won’t want to agree to any additional appreciation of its currency against the US dollar because, with world growth weak, it wants more than ever to beat the eurozone, US and Japan in terms of competitiveness.

On the other side of the equation, neither Obama nor Brown really want to change the game. Each of them presides over a government running a fiscal deficit that is of the order of 13 per cent of GDP. Tax cuts and cash for clunkers are policies that use government money to simulate consumer spending. Who provides the funds? Well, the Chinese keep buying US debt.

How might the global economy’s imbalances be resolved? If the US and UK slashed their fiscal deficits, they would face recession, their trade deficits would fall, Chinese exports would plummet, the whole world would struggle. That would be the quick way to rebalance the world economy. The long slow road is the only one that any nation is going to take.