Unsustainable two-speed recovery20 November, 2010, 11:11. Posted by Zarathustra
Tags: Economy, US
Also sprach Bernanke:
That said, in the short term, rebalancing economic growth between the advanced and emerging market economies should remain a common objective, as a two-speed global recovery may not be sustainable. Appropriately accommodative policies in the advanced economies help rather hinder this process. But the rebalancing of growth would also be facilitated if fast-growing countries, especially those with large current account surpluses, would take action to reduce their surpluses, while slow-growing countries, especially those with large current account deficits, take parallel actions to reduce those deficits. Some shift of demand from surplus to deficit countries, which could be compensated for if necessary by actions to strengthen domestic demand in the surplus countries, would accomplish two objectives. First, it would be a down payment toward global rebalancing of trade and current accounts, an essential outcome for long-run economic and financial stability. Second, improving the trade balances of slow-growing countries would help them grow more quickly, perhaps reducing the need for accommodative policies in those countries while enhancing the sustainability of the global recovery. Unfortunately, so long as exchange rate adjustment is incomplete and global growth prospects are markedly uneven, the problem of excessively strong capital inflows to emerging markets may persist.
Easier said than done. Just as Ben Bernanke put it:
… the internal rebalancing associated with exchange rate appreciation–that is, the shifting of resources and productive capacity from production for external markets to production for the domestic market–takes time.
Reducing surpluses in China and deficits in the United States requires the Chinese spending more and export less while the Americans spending less. Both are not an easy task. The Chinese Yuan is undervalued, but as long as the Americans keep on spending much, Chinese Yuan appreciation will not help bringing down its surpluses.
As I have written previously, the dilemma here is that these fast-growing countries are already facing the problems of overheating. Most notably, China has a huge current account deficits with an undervalued currency. China is trying to tighten policy as it has raised interest rate once and hike reserve requirement for twice over the past few weeks. Although I do not expect any noticeable cooling effect in the short-run, more tightening will be down the road in the next year, which will eventually bring down the Chinese economy.