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Global imbalances – where are they and do they matter?

Global imbalances – where are they and do they matter?. William R White Head of the Monetary and Economic Department Bank for International Settlements, Basel Slides prepared for the Chatham House Conference on Global Financial Imbalances New York, 24 April 2006. 1. Four sections.

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Global imbalances – where are they and do they matter?

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  1. Global imbalances – where are they and do they matter? William R White Head of the Monetary and Economic Department Bank for International Settlements, Basel Slides prepared for the Chatham House Conference on Global Financial Imbalances New York, 24 April 2006 1

  2. Four sections • Everything is interrelated • The facts • What are people worried about? • Should they be worried?

  3. Everything is interrelated • (S-I) = (X-M) = CF = (M*-X*) = (I*-S*) • External imbalances reflect internal imbalances • Should they be worried?

  4. The facts • the US trade deficit is huge • the trade counterparties are diverse • the US also borrows to lend • the sources of finance are diverse but changing

  5. What are people worried about? • a smooth adjustment is possible, but not inevitable • problems of factor adjustment • protectionism • impatience in financial markets

  6. Should they be worried? • a current account perspective • a currency share perspective • a financial problem needing a real solution

  7. No problem from a current account perspective? • three reasons why strong US productivity growth helps • the “savings glut” hypothesis • the valuation bonus for the US • dark matter

  8. But counterarguments are convincing • troubling facts and the productivity argument • foreign dissaving with the US at full employment • the valuation loss for foreigners • even less than meets the eye

  9. No problem from a currency share perspective? • private sector holdings of dollar liabilities • public sector holdings of dollar liabilities • former much larger, but influenced by the latter

  10. Private sector holdings not a problem? • no dollar overhang • home bias is big but declining • moderate increases in rates provide adequate support for dollar

  11. But counterarguments are convincing • moderate covering could have big effects • declining home bias cuts two ways • low domestic rates support spending and imports

  12. Public sector holdings not a problem? • no dollar overhang (ex Japan) • the Bretton Woods II hypothesis • the world needs the liquidity

  13. But counterarguments are convincing • the dollar “bloc” is getting smaller • vendor financing is convenient, not sustainable • more global liquidity creates more problems than its cures

  14. Conclusions • do global imbalances matter? • arguments both ways, BUT • mean-reversion is more common than not

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