- The Washington Times - Thursday, April 27, 2006

As the recent International Monetary Fund meetings in Washington confirmed, global economic imbalances, particularly the inextricably linked ones involving the U.S. and Chinese economies, have continued to soar. The data and their trends should concern everyone. Indeed, in a surprising development over the weekend, economic policymakers from around the world agreed to empower the IMF to serve in a surveilling role while nations seek to unwind these potentially debilitating imbalances.

As Treasury Secretary John Snow declared in a statement, “reducing global imbalances is a shared responsibility requiring complementary actions by a large number of economies.” Suggesting that a propitious moment to act has arrived, Mr. Snow also noted that “global economic growth will likely be above 4 percent this year for the fourth consecutive year,” a feat that has not been achieved in more than three decades. If “complementary actions” cannot be undertaken in this environment, they will likely never be pursued until circumstances force policymakers to act. By then, the consequences of the actions will be far more painful. To the extent that the IMF can facilitate the timely undertaking of those “complementary actions” in its new role, which appropriately does not allow it to force nations to adopt policies, the organization will be making a vital, positive contribution to global economic stability.

The growing imbalances afflicting America’s economy give ample cause for concern. Consider the recent trend in the current-account balance, which is the broadest measure of a nation’s international trade position, and its effect on America’s status as the world’s largest debtor nation. As the annual U.S. current-account deficit steadily increased from $125 billion (1.6 percent of gross domestic product) in 1996 to $668 billion (5.7 percent of GDP) in 2004, America’s net international-investment position deteriorated from a negative $500 billion (6.3 percent of GDP) at the end of 1996 to a negative $2.5 trillion (21.2 percent of GDP) at the end of 2004.

For perspective, as recently as 1980, America had a positive net international-investment position of $360 billion (12.9 percent of GDP). A quarter century ago, America was the world’s pre-eminent creditor nation. Now we are the world’s largest debtor. And the situation is far worse today than it was at the end of 2004.

America’s recently skyrocketing negative international-investment position derives from the fact that the growth of foreign-owned assets in the United States has far exceeded the growth of U.S.-owned assets abroad. Moreover, America’s rising current-account deficits have directly led to its deteriorating international-investment position. In 2005 the U.S. current-account deficit exceeded $800 billion (6.4 percent of GDP). As a result, at the end of last year, America’s net debtor position, figures for which have not yet been released, surpassed $3 trillion and probably exceeded 26 percent of GDP. Barring a massive, disorderly depreciation of the dollar, which would cause interest rates and inflationary pressures to rise in the United States, probably derailing the expansion, America’s negative international-investment position will likely exceed $4 trillion (30 percent of GDP) by the end of 2006. This year’s current-account deficit is on track to reach $900 billion, and, depending upon oil prices, could surpass $1 trillion (7.5 percent of GDP).

Meanwhile, since 1996, China’s foreign-exchange reserves have soared from $200 billion to more than $850 billion, much of it invested in U.S. Treasury debt. In recent years, America’s fiscal situation has massively deteriorated; the federal-budget surplus of nearly $250 billion in 2000 has turned into budget deficits averaging $370 billion over the past three years. Because the U.S. personal saving rate has been plunging in recent years, and actually became negative in 2005 for the first time since the Great Depression, virtually all of the recent record-level U.S. budget deficits have been financed from abroad. Much of that lending has come from China and other developing nations, whose export-led economies have generated sizable current-account surpluses. In turn, those surpluses have been recycled into loans to finance America’s current-account deficits, which represent the extent that U.S. consumption exceeds its production.

Nobody believes that these already-outsized global imbalances can continue to increase at recent rates indefinitely. Indeed, more than a few economists have remarked how bizarre the recent trend has been: Notwithstanding China’s exceptional economic growth rates over the past two decades, well over half a billion Chinese remain deeply impoverished in a nation whose infrastructure is still woefully inadequate. The fact that such a relatively poor, still-developing nation has been sending its much-needed savings to one of the world’s richest nations to finance overconsumption truly is bizarre.

With its personal and public saving rates negative, America has become habituated to the capital inflow. Those funds have conveniently kept U.S. long-term interest rates very low, albeit at the expense of causing America’s foreign-debt level to soar. At the same time, China has become habituated to its overvalued currency, which has permitted it to pursue export-led development at the expense of underconsumption at home. To maintain its overvalued currency, China recycles its trade surplus into U.S. Treasury securities.

With the agreement of all interested parties, including the seven rich, developed nations comprising the G-7 and the major emerging-market countries, such as China, India and Brazil, which make up the G-20, the IMF has been given a mandate to address these global imbalances. There are, of course, no guarantees. But with America’s net international investment position having swung from a positive level equal to 13 percent of GDP in 1980 to a negative level likely to reach 30 percent of GDP this year, any long- overdue progress in redressing these deeply disturbing global imbalances would be a major policy achievement.

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