This paper reviews competing explanations for the pattern of global imbalances and the magnitude of the U.S. external deficit. It argues that, far from being incompatible, existing explanations are all parts of the larger story. The decline in savings rates in the United States has played an important role in the emergence of global and U.S. imbalances. At the same time, favorable productivity trends have made the U.S. a more appealing place to invest, attracting foreign savings that help to underwrite U.S. investment and finance the current account. The so-called global savings glut is a factor in the global imbalance insofar as it supports capital flows to and investment in the United States. Finally, the Sino-American co-dependency view emphasizes how Asian countries, owing to a combination of heightened risk aversion following the 1997–8 crisis and their continued commitment to export-led growth, are happy with a situation where export demand is disproportionately important relative to domestic demand, a position that is sustained by undervalued exchange rates and reflected in rapid U.S. import growth.
The Blind Men and the Elephant
The problem of global imbalances and the persistence of the U.S. deficit have been the subject of wildly differing interpretations. Among the most prominent are the deficient U.S. savings view, the new economy view, the global savings glut view, and the Sino-American codependency view. These four interpretations have different policy implications and suggest different scenarios for the future of the world economy.
Nouriel Roubini has a paper where he likens the existence of different perspectives to the Kurosawa film Rashomon, in which a series of observers give varying accounts of the same set of events.2 The analogy is suggestive, which is why I cite it here. But the interpretations that I distinguish are not the same as Roubini's. More importantly, I draw different conclusions from the existence of these different perspectives. In Kurosawa's film the competing accounts are all self-serving, a pattern that Roubini suggests carries over to the discussion of global imbalances. Moreover, in Roubini's interpretation there is only one consistent, empirically defensible characterization of the facts. Here, in contrast, I argue that the exponents of different interpretations have all got their fingers on important aspects of the larger reality. Their accounts are not incompatible. But they are partial. Grasping the nature of the problem requires acknowledging that there is some validity to all four views. The right analogy is not Rashomon, therefore, but the blind men and the elephant.
In the following section, I build a discussion of this point on the platform of the conventional current account identities. But simply saying that there is some validity to all four views is not very helpful for those concerned with the future. I therefore next address the question of what these scenarios imply for future prospects. The paper concludes by drawing out the implications for policy.