The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy by Michael Pettis

The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy by Michael Pettis

C h a p t e r  o n e
Trade Imbalances and the Global Financial Crisis

The source of the global crisis through which we are living
can be found in the great trade and capital flow imbalances
of the past decade or two. Unfortunately because balance of
payments mechanisms are so poorly understood, much of
the debate about the crisis is caught up in muddled
analysis.
Ever since the U.S. subprime crisis began in 2007– 8,
caused in large part by an uncontrolled real estate boom
and consumption binge, fueled in both cases by overly
abundant capital and low interest rates, the world has been
struggling with a series of deep and seemingly unrelated
financial and economic crises. The most notable of these is
the crisis affecting Europe, which deepened spectacularly in
2010– 11.
For reasons we will see in chapter 6, Europe’s crisis will
probably lead to a partial breakup of the euro as well as to
defaults or debt restructurings among one or more
European sovereign borrowers. The only things likely to save
the euro— fiscal union or, as I discuss in chapter 6, a major
reversal of German trade imbalances— seem politically
improbable as of the time of this writing.
But it is not the just the United States and Europe that have
been affected.
The global crisis has also accelerated pressure on what was
already going to be a very difficult transition for China from
an extremely imbalanced growth model to something more
sustainable over the long term. For political reasons the
adjustment had to be postponed through 2012 because of
the

The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy by Michael Pettis