Cambridge Business Association
The Great Rebalancing
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The Great Rebalancing

Trade, Conflict, and the Perilous Road Ahead for the World Economy

Michael Pettis
Princeton UP, 2013
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Editorial Rating

7

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  • Innovative

Recommendation

No mystery surrounds the 2008 financial crisis and its enduring aftermath, according to finance and economics professor Michael Pettis; it is a direct result of global capital and trade imbalances that have accumulated over time. The common misconception is that trade or country-specific spending cultures – for instance, China’s market controls, Germany’s penchant for savings, Greece’s lackadaisical attitude, and America’s greedy bankers and spendthrift consumers – cause such imbalances. However, Pettis says the real cause is that countries follow destabilizing policies that create dangerous disparities between what they produce and what they consume. The ongoing crisis will persist, he warns, until governments correct these imbalances, but that could result in a decade of slow growth for China and painful adjustment for Germany. Understanding macroeconomics will help your comprehension of this thesis, which some readers may find controversial or too theoretical. Nonetheless, getAbstract believes this text offers an intriguing, alternative take on what led to – and could help solve – the global crisis.

Summary

The World Is Just One Large Closed Economy

Trade and capital movements among the world’s nations indicate the health or instability of the global economy. The ebbs and flows of a country’s domestic production and consumption affect its trade position; the gap between its overall production and consumption represents its savings. If a country can’t consume all that its economy produces, it exports that excess savings in the form of capital. Thus, the global economy would be balanced if the total of the world’s trade deficits equaled the total of the world’s trade surpluses. A country’s trade balance is the gap between its total domestic savings and its total domestic investment. Thus, a national government’s policy targeting savings or investment must have an offset in opposite policies in other countries, since nations either export their excess or import any shortfall. When any of these variable savings or investments is out of long-term balance, instability ensues and crises develop.

An increased concentration of wealth creates a problem because wealthy consumers’ amount of consumption does not rise in tandem with their wealth. When consumption is less than production...

About the Author

Michael Pettis, a professor of finance and economics at Peking University, is also a senior associate at the Carnegie Endowment and the author of The Volatility Machine.

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