*The Great Rebalancing*

by on January 27, 2013 at 2:56 am in Books, Economics | Permalink

The author is Michael Pettis and the subtitle is Trade, Conflict, and the Perilous Road Ahead for the World Economy.

Here is one excerpt:

There are huge tracts of empty homes outside of Dublin in part because of the overvaluation of East Germany’s currency after reunification.

I take his core message to be something like the following: DeLong and Krugman circa 2005-6 were right that the fundamental problem with the global economy is one of rebalancing out of whack trade flows.  The comeuppance is still on the way.

I hold two somewhat different views than those professed in this book, or at least I would describe them as different emphases.  The first is that explanations for resource unemployment, in my view, should be conducted across shorter and more local time scales.  The second is that even apparently unsustainable trade balances can be kept in manageable order if growth is healthy enough, admittedly a big “if.”  That said, I agree with the author that the global economy, despite recent declines in risk premia, still is not out of the woods.

We will of course see.  This book in any case makes for stimulating reading.  Here is the book’s home page.

Addendum: Also arrived on my desk from PUP is Peter Temin and David Vines, The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It.

prior_approval January 27, 2013 at 3:31 am

Of course, this statement is equally true – ‘There are huge tracts of empty buildings in East Germany in part because of the overvaluation of East Germany’s currency after reunification.’

Which then makes one wonder if this statement is equally true – ‘There are huge tracts of empty buildings in East Germany and empty vacation homes in Spain in part because of the overvaluation of East Germany’s currency after reunification.’

Which then leads to a further statement – ‘There are huge tracts of empty buildings in East Germany and empty vacation homes in Spain and empty homes outside of Las Vegas in part because of the overvaluation of East Germany’s currency after reunification.’

And because why stop at two continents, let’s skip to now – ‘There are huge tracts of empty buildings in East Germany and empty vacation homes in Spain and empty homes outside of Las Vegas and empty apartment buildings in China in part because of the overvaluation of East Germany’s currency after reunification.’

Like, wow, man, it is all connected. Especially considering that Kohl’s cynical overvaluation dates to 1990. Anybody interested in a non-Irish view of that fateful D mark / Ost mark conversion is welcome to read an English language article here (from 2010, marking the 20th anniversary of that ‘currency conversion’) – http://www.spiegel.de/international/germany/germany-s-disappointing-reunification-how-the-east-was-lost-a-703802.html

Andreas Moser January 27, 2013 at 4:23 am

An Irishman building a house he doesn’t need in 2007 is as connected to German reunification in 1990 as the Newtown shooting in December 2012 was connected to the bakery which sold some bread to the shooter in May 2001, for otherwise he would have starved.

A lot of things are “connected”. But later events, especially if driven by the affected people/country itself (in this case Ireland) usually override the causal link to previous and distant events.

In a way, the Irish building boom can surely also be connected to the English occupation of the island. Or maybe to the Christianization of it.

dearieme January 27, 2013 at 5:39 am

“The Leaderless Economy”: yep, what we need is a Führer.

prior_approval January 27, 2013 at 7:07 am

Autobahns for everyone – and a VW in every driveway.

Brian Donohue January 27, 2013 at 9:38 am

+1000

Bill January 27, 2013 at 7:52 am

Re: ” I agree with the author that the global economy…, still is not out of the woods.”

When hasn’t this been true?

Dismalist January 27, 2013 at 9:38 am

Operational question: When we see a trade flow, how can we tell whether it is in whack or out of whack?

lxm January 27, 2013 at 12:09 pm

Global. I am glad to see this type of approach appear. Just focusing on the macro issues of one nation’s economy may be insufficient to solve its problems. I am sure there are some valuable insights here.

Of course our policy makers will be quite capable of ignoring this type of analysis. I mean just look at some of the comments already on this thread. And, I am sure I will never read either of these books.

lxm January 27, 2013 at 1:49 pm
Tom January 28, 2013 at 4:21 am

I will be buying Temin’s book. Thank you for posting.

Geoff in Tianjin January 28, 2013 at 9:14 pm

Pettis isn’t saying that everything is connected. He’s saying that economies are and in ways that are not at all intuitive (and even counter-intuitive). An example of this would be that a country’s trade surplus/deficit directly flows from its own policies on domestic consumption and that those seemingly internal policies are actually trade policies that directly impose themselves on the rest of the world.

He uses this kind of (straightforward) analysis to demonstrate that, say, China’s trade surplus has nothing to do with the reputed moral thrift (there is none) of the Chinese and has everything to do with China’s domestic policies – policies that divert funds from the household sector to the export sector (effectively, households subsidizing exporters). It’s these domestic policies that have created China’s trade surplus, a surplus which is then necessarily recycled to the rest of the world as capital exports. Taking those capital exports as given, it follows that the rest of the world – predominantly the US – really has no choice in the matter as there’s no mechanism to stop China (or any country) buying dollars and thereby “forcing” the rest of the world, in aggregate, to run a corresponding trade deficit. Implicitly, America’s trade deficit has nothing to do with “Americans’ love of spending beyond their means” but, rather, is a direct and logical consequence of trade policies elsewhere, policies that might seem like foreign countries’ merely domestic arrangements but aren’t (and they aren’t because any policies that influence savings, consumption and investment are, in fact, trade policies).

Pettis’ book is a masterpiece of clear thinking. I’d recommend it to anyone who, in particular, has an interest in China.

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