Dimitri B. Papadimitriou: Global imbalances: The U.S. and the rest of the world

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Dimitri B. Papadimitriou

Global imbalances: The U.S. and the rest of the world

27 pp.
4.20 EUR
(March 2009)

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Dimitri B. Papadimitriou starts with the observation that everyone knows the United States is effectively living beyond its means by borrowing heavily from its trade partners (notably, China, Japan and the European Union) to sustain current levels of consumption. But no one really knows how this will end. For America’s creditors have become dependent on Americans’ profligacy to power their economic growth, and thus have many incentives to keep the co-dependency cycle going on indefinitely. Unless a satisfactory long-term fix that permits fullemployment without massive imbalances is achieved with international cooperation, a radical solution may be necessary. This chapter reviews what is believed to be the most important economic issue facing policymakers in the USA and abroad: the prospect of growth recession in the U.S. linked to imbalances in the country’s current account, government, and private sector deficits. The chapter concludes that given the declining housing and equity prices and the concomitant drop in net lending, a renewed stimulus from fiscal policy may be necessary. Alternatively, the solution would be to raise net export demand with 20 to 30 percent dollar devaluation (disorderly or not), even though this might itself be difficult to bring about.

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