Just watched the intriguing debate below. fwiw, it feels like at times participants deviated back towards their areas of expertise and away fromp the crux of Pettis/Klein's fundamental arguments. My own understanding of the
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arguments brought fwd by @michaelxpettis/@M_C_Klein after finishing their book and following Pettis' writings over the years is as follows: trade tensions are very much a function of 'class wars' within major economies. The book highlighted policies which indirectly/directly
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shifted large portions of income away from the consuming classes of in major surplus economies such as CN/GE. @Brad_Setser highlighted how Asia played a significant role post-AFC. As an fixed inc investor in Asia, it is also easy to observe the mix of policies including
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financial repression, undervalued FX, fiscal conservatism, labour reforms, and mandatory saving schemes etc. and how such 'excess savings' are recycled into USD fin assets. The corresponding deficits are primarily run by economies with open capital
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regimes. There are only a few ways S-I can go negative for these economies (this is where individual context is impt). @michaelxpettis has previously argued that US - under the current global regime - faces a choice of higher unemployment or higher debt
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whether the latter is growth conducive or not depends upon the use of debt and structure of liabilities. In the leadup to the GFC, debt was in the form of household leverage into real estate. Such 'indebted demand' is neither growth conducive nor productive. Perhaps infra is
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a potential low hanging fruit (non-inflationary and productive in the medium term to the extent debt burden may not increase). The pt is overall BoP imbalances are not adjusted in a way which is growth conducive for the world and absorption of excess savings is too lop-sided
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The most idealistic way to resolve this in a win-win manner is global cooperation in remaking the global financial architecture. The use of Bancor - proposed by Kenyes - could be a viable solution (an automatic adjustment mechanism which imposes costs on persistent surpluses)
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But global coop is unlikely in the geopolitical context, which limits options to unilateral ones. Unilateral actions such as trade tariffs only addresses bilateral balances and not overall balances (while value chains adjustments can also be costly). In a world whereby capital
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flows dominate trade flows, a well-designed capital inflow 'restriction/tax' system is more effective. It is not ideal, but maybe most effective from the perspective of the US. @JWMason1 argues mere accounting identities are less relevant without specifying adj mechanisms.
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That is true. But what is also true is that life is never determined by simple 1st derivatives (e.g. one-off rise in interest rates, or depreciation of currency) but by various reflexivities within constraints. If a world whereby beggar-thy-neighbour policies remain intense,
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the only way for the US to not face the same options would be to reduce its 'institutional willingness' to absorb excess savings. This can improve domestic financial stability. In the international context, the onus will then be on surplus economies to either absorb the costs
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of running persistent surpluses, or choose to recycle into more productive investments, or choose to focus on building more sustainable sources of domestic demand. & this goes back to direct/indirect redistribution policies, a central theme of the book.
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The intention would be to reemphasize the need to look at arguments in totality, and not targeting specifics while losing sense of the context and underlying conditions upon which arguments are made. Personally I feel @michaelxpettis and @M_C_Klein present a convincing case
