The Great Rebalancing

December 10, 2012
A painful reckoning awaits an out-of-whack global economy, according to this insightful treatise on international economics. Peking University economist Pettis (The Volatility Machine) offers a sweeping perspective that links trade, exchange rates, and cross-border capital flows to underlying domestic taxation, investment, and fiscal policies. His diagnosis of the world slump emphasizes lock-step trade and financial imbalances: the actions of creditor nations like China and Germany in boosting their domestic savings rates, subsidizing capital investment, and running vast trade surpluses, he argues, force countries like the United States and Spain into a regime of low savings, high debt, and sluggish growth. Without adjustments on all sides, he warns, equilibrium will return only through chaotic devaluations and crippling unemployment. Pettis’s erudite, but lucid and very readable analysis brims with surprising ripostes to conventional wisdom (Chinese purchases of American treasury bonds, he insists, do little to help finance U.S. government debt). By focusing on automatic, almost Newtonian mechanisms of trade and finance, Pettis rejects the moralizing that pegs countries as either virtuous ants or improvident grasshoppers; he thinks excessive national thriftiness is at least as sinful as extravagant consumption. Pettis’s stimulating, contrarian take on the present crisis challenges dogma with clear thinking.