CFR has put together an excellent “Global Imbalances Tracker” that allows users access to current account data in a very handy format. There were two things that struck me most as I went through it.

on.cfr.org/3mIWx7W via @CFR_org

First, CFR helpfully groups together the Anglophone countries (US, UK, Canada, Australia, NZ) to show that collectively they typically account for roughly 2/3s to 3/4s of global current account deficits. This is an extraordinarily high share, especially considering that...

trade theory suggests advanced economies should generally be running surpluses. In fact the CFR data show that other advanced economies do indeed overwhelmingly run current account surpluses, collectively accounting for roughly two-thirds of total global surpluses.

Why should the Anglophone economies, especially the US and the UK, diverge so strongly? I have long argued that what these finance-dominated economies have most in common are flexible, highly liquid, and well-governed capital markets that receive a disproportionate...

share of global excess savings, and it is their absorption of foreign excess savings that forces down their domestic savings and drives their current-account deficit positions. The CFR data are very consistent with this argument.

The second thing that struck me is Mexico’s current account position. At the beginning of Trump’s presidency Mexico ran a current account deficit equal to roughly 8-10% of its GDP, which means it was absorbing excess global savings of that same amount, and so relieving...

the US of a comparable burden. This actually helped reduce the US current account deficit, even though the US ran a large bilateral deficit with Mexico (which is just more evidence that bilateral trade data is all but useless in determining trade pressures).

Over the next four years, however, Mexico’s overall deficit shrank rapidly, to end in a surplus of roughly 5% of GDP. This means that during this period Mexico went from helping to relieve the US from absorbing excess global savings to adding to the burden, which is...

exactly what @M_C_Klein and I argued would most likely happen if trade conflict with Mexico undermined confidence in the Mexican economy. It turns out that the US would have been better off from a trade point of view if it...


had supported the Mexican economy rather than burden it with a misconceived trade conflict. The more excess savings invested in developing economies, it turns out, the better for everyone.


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More from @michaelxpettis

8 Apr

Good piece by @yuenyuenang in which she argues that the conditions have changed that once made GDP growth targets useful as a way of organizing and directing China's growth model. What made crude sense when China was very poor no longer makes sense.


I agree. In the 1980s China was so underinvested for its level of institutional development that the best thing it could do for growth was to organize its financial and governance systems around maximizing investment in infrastructure and manufacturing. It didn't even...

matter how poorly projects were selected and how inefficiently the financial system allocated capital as long as investment was maximized.

GDP growth targets in that case helped because all it took to meet them was more gross investment, and so they became a...
Read 10 tweets
7 Apr

Good piece by @endacurran on the risks associated with the surge in hot money inflows into China, and Beijing's attempt to counter some of the adverse monetary and currency impact with a slew of small measures to encourage outflows.


The problem is that even if they succeed in encouraging outflows when they need them (about which I am skeptical), this will not do anything to fix the very negative balance-sheet impact.

I've been arguing since late last year that this is going to be something we...

increasingly talk about, especially towards the end of this year and next. The IMF claimed in their press conference Tuesday that foreign investors are allocating stable capital into. China, and that this capital is unlikely to flit around, but I am pretty skeptical.
Read 5 tweets
7 Apr

As expected, consumption in China seems to be rebounding strongly, and exports are expected to continue growing. The IMF is taking this to mean that they should upgrade their 2021 GDP growth expectations for China to 8.4%.


My view is different. I think strong consumption and export numbers will give Beijing a chance to cut back more sharply on credit growth, which basically means cutting back on investment in real-estate development and infrastructure...


spending, which is why I expect consumption and exports to continue strengthening without raising GDP growth expectations. Remember that Beijing uses this investment mainly as the residual needed to plug the gap between "high quality growth" and the...
Read 8 tweets
6 Apr

Very interesting piece by @Birdyword on some of the ways property developers like Evergrande manage debt, partly by replacing debt-like instruments that are classified as debt with debt-like instruments that are not technically classified as debt.


We've seen similar things many times before, for example when local governments replaced their direct borrowings, which showed up as local government debt, with borrowing through SPVs, which didn't. Anyone very familiar with the history of these borrowing frenzies knows...

that in the late bubble stages not only do we usually get financial "innovation" that allows borrowers to reclassify or disguise what is still fundamentally debt (remember the Greek loan disguised as a currency swap?), but worse, these structures often highly...
Read 7 tweets
5 Apr

Rajan is right to question "the notion that industrial countries can allow their sovereign debt to grow indefinitely". One of the many ways to misunderstand MMT is to believe that boosting domestic-currency government debt doesn't matter.


But it does indeed matter – beyond some level a higher debt burden can raise real costs for the economy, increase volatility, and reduce balance-sheet flexibility. But because I think the global economy is demand constrained, and not supply constrained, I am less worried...

than Rajan about the debt impact of "badly designed handouts".

What matters is not a nominal increase in the debt but rather an increase relative to the real debt-servicing capacity of the economy, for which GDP is a proxy, and to the extent that these handouts are...
Read 5 tweets
4 Apr

Although engineers in democracies may look longingly at the ability of authoritarian governments to force through major infrastructure projects, it is a mistake to think that this is the important difference between...


infrastructure building in China and the US. The checks and balances in democratic systems may reduce efficiency, but they are better at long-term adjustment, and so the differences reflect little more than the standard trade-offs between the two systems.

What really matters is the relationship between desired and actual investment. In the early 1990s, when it really began its infrastructure-building spree, after five decades of war and Maoism China was hugely underinvested in infrastructure for its level of development.
Read 12 tweets

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