February 10, 2011
Global imbalances are characterized by the large and persistent current account deficits in one group of systemic countries–most notably the United States–on one hand, and corresponding surpluses in another group, which includes China, Germany and the oil exporters. Their presence signals differences in savings and investment rates, differing capacities in their respective financial sectors to intermediate between borrowers and savers, policy choices that impede necessary adjustments, and the dependence of the system on the quality of policies in the core countries. As a result, large capital flows move across borders to fill these gaps.
In the run-up to the crisis, the main worry was that investors who had been hitherto financing the US deficit might change their minds, and that these large capital inflows would suddenly reverse, leading to a disorderly adjustment. In the event, the crisis took a different form—namely a sharp correction in asset prices in the US that led to dislocations in the financial system. Nevertheless, global imbalances played a role in the build-up of systemic risk: they contributed to low interest rates and large capital inflows into US and European banks, leading to a search for yield and the creation of riskier assets, both in the home markets of these banks as well as in some emerging markets. But the initial concern remains valid; indeed the recovery may not be sustainable in the face of continued imbalances as they hinder the necessary adjustments: deleveraging and rebuilding private balance sheets in deficit countries, facilitating fiscal adjustments where necessary, and encouraging consumption and reducing dependence on exports in surplus countries.