RISK FACTORS
- There might be chance of rising in public and private savings in USA and those spending will fall without a balance increase in demand in the rest of the world. If public and private savings drop in US the demand is not going to be equal by higher demand in other countries which results in a very slow growth in global economy.
- Investors could radically shrink their exposure to the United States, which may cause a negative impact in world financial markets and instability in financial markets definitely going to impact on trade in good and services or even worst by decrease in demand and supply.
- Adaptability of wrong-headed policies and procedures by the government which would make worse the damage to the global economy.
There is no relevant point to believe that we can’t apply old/historical fundamental economic and financial controls in today’s modern world. The need to believe is that we do need a mechanism to adjust market imbalances. If we took long it would affect the economy through a straight negative drop in demand and prices which results in declining in economic output as well.
(Remarks by David Dodge Governor of the Bank of Canada)
www.bis.org/review/r060404a.pdf
My Understanding
In the perspective of the global economy there is an increases amount of anxiety over the issue which is termed as Global imbalances. Those major imbalances that are exists are still unquestioned. However the threat that imbalance has given to the global economy and financial stability is unclear. These essential characteristics have converted a term global imbalances into an ideal term for research, for number of studies, articles, and reports etc both at national and international level. For a significant period of time no discussion of the crucial challenges in front of global financial markets and policy makers at international level was finalize with no indication to the “rising global imbalances”, exemplify popularly by the US current account deficit. (Chart 1)
There can be number of options to consider at these disequilibria. In reality the dual face of the issue has been a key factor of the chaos and misrepresentation which often surrounds it
The trade imbalance
First we need to know that the current account imbalances can also be taken mainly as foreign trade issues. This is due to transmit the discussion which is related to joint trade relationships between United States and China. The overall operation of US to import goods and services from china has rises by 30% yoy in 2004 to $197bn. This whole activity leads to keep and eye on exchange rates and in individual on the cause of the pegged renminbi on Chinese exports. But here what the question arises is does it really helpful the way we are thinking. In general perspective I guess its not, this approach of thinking can give an invalid and risky conclusion for example the reason of wholesale demolition of US job industry are Chinese imports! And the like.
(Commerzbank Economic Research (2004) and (2005a)
The domestic US imbalances
Above and all a current account deficit can also be consider as a sign of a domestic imbalances i.e. the overload of investment over saving. Ultimately it does give implication to explain the current account deficit mainly due to adding up all consumption and investment decisions/domestic savings.
This above mention chart demonstrates activities such as the winds of surplus in the corporate sector and deficit in the household sector as is more traditionally-the public sector. With the allocation of whole private investment in GDP at present seems to be a bit close to its long-run average, the most ordinary description of the latest enlargement can be seen as surplus/excess of consumption in the United States current account deficit neither due to over-investment.
(Commerzbank Economic Research (2004) and (2005a)
If we give a thorough review and study deeply the whole scenario of imbalances we can observe there might be some risks and uncertainties that are attached to short-term outlook .In general the number of increase in latest deviation in growth rates at the regional level is a disturbing feature of the expansion which is in progress.
Predictions are continuing at rise for USA along with China and other countries market who are coming forward. In 2005 there is a negative down in growth as actually predicted in Japan and Euro region which replicate ultimate feeble domestic demand and vacillating exports. With all this we can’t ignore the reaction and impact on oil prices which have crosses the limits and reached at the top during last October and the market which is already squeeze can squeeze further. There might be some other basis of uncertainty such as withdrawing liquidity by monetary authorities that is washing around the world financial markets due to out come of likely increase in the risk prices.
In starting of early 1990’s it is estimated that the current account deficit of United States would reach to approximately $645 billion in 2004 or equal to 5 ½ percent of its GDP and the major players of this whole activity was the United States and its major partners who are in hand to hand with USA in trading activities and at certain point of level the oil prices.
There is also an extensive increase in US indebtedness to its non-residents due to chain of current account deficits.
Rajan, R.2005.Global Current Account Imbalances: Hard Landing or Soft Landing.
www.imf.org/external/np/speeches/2005/031505.htm
It was estimated that at the end of 2003 the total external indebtedness of USA (which is the total demand of non residents) calculated more then 250 percent with reference to its services provided and exports of goods and 25 percent approximately of its GDP. I hope its is known to every buddy that the reason for rising in the US current account deficit which occurs during the second half of 1990s is due to large number of investment by the private sector of United States not due to declining rate in savings.
Since 2000 its shows a different activity with a fall in savings in public sector which is due to fiscal deficit is on the rise which is supported by house hold saving rates which are already near to the ground. Private investments which show a positive start were up to mark since 2003 stay near to the ground of the mid 1990s.
The large number of current account surpluses in the ASEAN countries and NIEs was due to striking drop in numbers of investments, by and large too much investment earlier to the crises in 1997-98.Japan is an ideal example of this whole scenario. If we compare all these countries there is no such changing in savings rate which results in flowing huge surpluses. According to few saving investment analyst it is necessary to have robust growth in Japan and Europe, Bulk investment in the ASEAN and NIEs, United States have to put more focus on large number of savings and China has to increase its consumption power to reduce imbalances.
In the last few years at last China is the immunity in that reserves and keep moving towards growth but we can’t that forget it covered with a shadow of surpluses due to high growth rate of savings.
It is necessary to stay focus on our mission which is to reduce the level of deficit to a medium term which should prolong in USA but not too stuck to flow with current account surplus. It is finally identified with the help of macro-balance calculations that United States can maintain a deficit in the mid term of between 2 and 3 percent of its GDP with no explosions which is with the help of increasing its productivity level and through younger generation, which means that USA has to chop down its existing current account deficit (approximately 5.5 percent of GDP) by someplace one half and two thirds.
To take this initiative a little bit adjustments needs to be done in the real exchange rates, but this might create a problem with the perspective of financial markets if we got late to make necessary adjustments. The long this deficit goes the more vital purchasing activity of US financial assets can be seen by foreign investors. Therefore the value of US dollar needs to be decline more if we want to bring consistency in the bulk distribution of dollar as it deserve to be.
Rajan, R.2005.Global Current Account Imbalances: Hard Landing or Soft Landing.
www.imf.org/external/np/speeches/2005/031505.htm
CORRECTIVE MEASURES
Policy makers and concerned authorities around the world have to feel that its their responsibility to designed certain mechanism which positively facilitate adjustments that keeps the global economy rising at potential and diminish the impact of these risks. We all know to resolve global imbalances we do need a solution which should be a market based solutions. In certain cases to build the right framework we have to eliminate some of the policies that restrain markets from resolving these imbalances. This was the theme of the G7 discussions at Boca Raton two years ago.
Central Bankers and finance ministers emerge from the Boca Raton meetings with a list of policy initiatives that are key to addressing global current account imbalances. The list included five priorities:
- Microeconomic policies that increase flexibility and raise productivity growth and employment.
To tackle ideally with global current account imbalances we have to put serious consideration on all five policy fronts. It’s not simply workable for countries to simply pick one or two policies priorities of their choices and ignore the others. We can’t deceive ourselves into thinking that these economic imbalances will be resolved simply with the help of making adjustment in exchange rates alone. To make a difference, we have to proceed extensively, internationally, and simultaneously. In well running domestic economics they have a developed and proper market based mechanism due to which we are able to see a bulk flow of savings both sector wise and region wise and because of their market mechanism there is no such disturbance in the whole activity. Every buddy is willing to have such mechanism or domestic policy everywhere that gives a true picture of positive functioning markets for goods services, goods, capital and labour
- The development of well-functioning domestic capital and financial markets.
The aim behind this is to we need to develop a certain kind of rigid mechanism for both domestic capital and financial markets which does not allow any kind of interference by capital controls and policies.
- Resumption of the Doha round of multilateral trade negotiations.
It seem a bit difficult by pushing Doha round to a winning end for all countries who are working to secure and expand the activity of flow of goods and services free of cost and to make sure the correct compliance with the rules which are applicable to perform such trade with the support of WTO.
- Sound fiscal policies.
We need to develop such fiscal policies which should be sound and on medium term basis. Countries would need to continue those policies which are low in ratio for public debt to GDP, which gives a positive impact on their household levels and on government consumption.
- Flexible exchange rates that reflect economic fundamentals and promote smooth adjustments.
We also need to develop such policy that some way or the other focuses on economic fundamentals and help smooth adjustments. For example labour markets are still in crises situation and rigid which definitely impacts on the wages and prices because there is no such flexibility to adjust these shocks. So there is a need to develop such exchange rates which should be known as market based exchange rates which can play their role as a ‘shock absorber’, helping the economy to respond to external pressures more promptly as compare to fixed exchange rates.
(Remarks by David Dodge Governor of the Bank of Canada)
www.bis.org/review/r060404a.pdf
CONCLUSION
We all are part of global circle and we are having a war with global economy .A major or minor economic disturbance for instance un-certainty in resolution of global imbalances will definitely some way or the other, directly or in directly going to impact on every countries economy, their markets, their currency their GDP or on individual as well. In this regard we all need to take certain initiatives or corrective measures with mutual understandings to reduce the probability of such disturbance. At local or domestic level authorities or policy makers have to design a strategy to develop and promote a concept of smooth operating markets for every commodity, labour, capital, goods and services. At international level the authorities need to consider to develop a structure which should focuses or market trends and on market behaviour and such disruptions of global imbalances doesn’t affect on these markets.
But its not that much easy at it seems to be, we cant exactly say that how long does it take to do such things, even we are not sure that would we be able to develop this kind of ideal scenario, we being a humans can at least try to make amendments to drive on a path of growth or real growth on positive functioning of financial activities, flexibility in currency system, concept of free international trade and well defined mechanism of fiscal and structural policies. In this global war every country has its own job description which they have to perform and this is the time to wake up, to make a difference and start believing that when path cross lives can change.
References:
David Dodge, Governor Bank of Canada.2006.”Global Imbalances: why worry, what to do “. Bank of Canada Review, spring 2006. [On line]. [Accessed on 4th Nov.2006].
www.bis.org/review/r060404a.pdf
Commerzbank Economic Research 2004 and 2005a
Rajan, R.2005.Global Current Account Imbalances: Hard Landing or Soft Landing.
www.imf.org/external/np/speeches/2005/031505.htm
Ragharam G.R.2005. “Global Imbalances and Financial Reforms with examples of China”. Cate journal, vol.26, No.2. [On line]. [Accessed on 1st Nov.2006].