The Great Rebalancing

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...