Don't blame the US for global imbalances

What are the Global Imbalances? was the topic for yesterday's dinners speech by Ian Macfarlane, Governor of the Reserve Bank of Australia. Macfarlane doubts the US should be blamed for global imbalances. Here is the key quote:

I do not want to give the impression that the large US current account deficit is not an imbalance, or that it can go on rising forever. Clearly, that is not the case. My view is only that we should not start our analysis with the US current account, or look to its remediation as the key to unwinding the imbalances. For example, the most commonly heard prescription is for the United States to reduce its call on world savings by reducing its fiscal deficit.

However, if my analysis is correct, a reduction in the US fiscal deficit by itself would be unlikely to have a major impact on international imbalances. In the absence of policy changes in Asia, the Asian countries would be likely to continue running surpluses, and so a fiscal contraction in the United States would only add a contractionary influence to a global economy already characterised by surplus saving and unusually low interest rates.

He also rejects the excess liquidity argument:

Another view that has recently been put is that it was excessively loose monetary policy rather than saving/investment imbalances that was at the heart of the problem. This view is generally bolstered by some reference to excessive liquidity, although the concept is left undefined. I do not find this argument at all convincing. There is no doubt that world interest rates have been exceptionally low, but does that of itself mean that monetary policy has been exceptionally loose? To maintain this view, you would have to believe, for example, that monetary policy in Japan and Europe , where there has been weak demand growth and negligible inflation for a number of years, should have been tightened, i.e. European and Japanese interest rates should have been raised. This would make no sense. The low level of interest rates in most developed countries is not the first cause of the global imbalances, it is the result of them.

Thanks to Mark Thoma and Stephen Kirchner for drawing my attention to it. Also worth checking out is the accompanying paper by RBA economist D Orsmond on Recent Trends in World Saving and Investment Patterns.

Comments

[Edward Hugh]

"He also rejects the excess liquidity argument:"

Hold on a second New Economist, from the quotes you provide, he isn't quite saying this. He isn't denying the existence of substantial liquidity (this among others things is already consacrated in this years annual report of the BIS). What he is saying is that this is an effect of something, not a cause.

The latest IMF WEO has a similar emphasis, when it says it is weak investment demand, not excess savings which is driving the imbalances. This I think is obvious - ie that demand for and supply of savings impact each other producing interest rates, in the same way we get oil prices - the interesting thing is why is demand in *some* European economies and Japan so weak, and why are some developed economies starting to produce so much saving (and others - the US, Spain - not)? That would be the part of the picture which is interesting to get through to.

What I am trying to say perhaps is that it would be more precise to say that he rejects the 'loose monetary policy' argument (Roach) rather than the 'savings glut' argument (Bernanke). This being the case I entirely agree with him. Looking through Roach's latest piece (Friday) in the GEF, the part of his story which I don't get is what he would have expected Greenspan to do. As Macfarlane indicates, tighter monetary policy in the US would only have made the global situation more contractionary, and I don't see how this would have helped anything.

One more point. You're a Taylor rule person, well my feeling is that it's getting increasingly difficult to argue that the significant disinflation we are seeing is due - in Europe and Japan at any rate - to the strict application of a consistent rule. We have very loose monetary and fiscal conditions, and very tame inflation, so the real issue is why?

(Qualification: by tame I don't mean there isn't an oil price rise. The issue is why the pass-through rate is so low. Incidentally, have you noticed, the two economies which are really starting to notice wage-push are Japan and Italy, where the labour force is starting to reduce for demographic reasons?).