Re-balancing the world economy?

From Bloomberg:

Group of 20 finance chiefs are struggling to agree whether to set targets for their current account imbalances as a way of defusing tension over currencies before it sparks a trade war.

G-20 finance ministers and central bankers began talks in Gyeongju, South Korea, today after weeks of wrangling over whether nations from the U.S. to China are relying on weaker exchange rates to spur growth.

Seeking a solution, U.S. Treasury Secretary Timothy F. Geithner proposed G-20 members pursue policies to reduce trade imbalances “below a specified share” of their economies, according to an Oct. 20 letter. That suggestion today split the group of emerging and industrial countries.

What does it really mean to limit the current account balance to a specific proportion to the GDP? Stop trading with each other will achieve this, but it cannot be the objective of this global coordination, I assume.

Photo by Hans Splinter

Rebalancing the global economy requires a lot of structural adjustment in all major economies. Current account balance, or trade balance if you like, is the focal point in the currency war or trade war discussions. The root of the imbalances between the United States and China are not currencies, but spending and saving. Shifting attention from currency to current account balance is certainly better than focusing on the valuation of currencies as it is closer to the real cause, but not close enough. To truly balance the global economy, the United States have to save more money and reduce spending in both private and public sector, while China consumers should spend more.

Current account balance targeting will not work if the fundamental problems of the US spending too much is not solved, unless you are proposing to all these countries to stop trading with each other, then the current account balance will drop to zero.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.