On Wednesday we wrote about the growing consensus among scholars and policymakers that unencumbered financial flows are bad, focusing on some recent research from the Bank for International Settlements.
Now we want to draw your attention to a detailed historical account of the interwar and pre-crisis financial systems by Claudio Borio, Harold James, and Hyun Song Shin.
Their aim is to explain which “global imbalances” mattered and which did not. Read more
The chart is from a recent IMF working paper. Don’t celebrate too quickly, though.
Here’s a description of what has happened since the crisis: Read more
Wondering where next to focus attention after the emerging market carnage? Citi has a bank chart for you:
Courtesy of the Bundesbank (h/t Dario Perkins):
In a nutshell, the paper concludes that current account adjustment is significantly hampered in countries that are members of a monetary union. This holds particularly in comparison with floating exchange rate regimes owing to the lower level of exchange rate flexibility. Furthermore, the persistence of current account balances in member countries of a monetary union is also more pronounced than in fixed-rate regimes due to less flexible interest rates as a result of the single monetary policy.
Charts, charts, charts, from Credit Suisse at the end of last week.
Here’s an eye-opening chart if ever there was one (H/T Sean Corrigan at Diapason):
There wasn’t a lot of sunshine to melt the avalanche of UK economic data released on Tuesday.
Revised UK Q4 GDP (-0.5 per cent rather than -0.6 per cent) and the UK Q4 current account deficit (-2.9 per cent compared to -2.4 per cent in Q3) came as little surprise. It’s too early to say what impact the poor growth figure will have into 2011 — and of course these so-called final GDP estimates will continue to be updated over the next few years. Read more
From BNP Paribas’ FX team on Thursday — an update on Europe’s current account:
We mentioned last week how HSBC’s analysts were beginning to worry more about quantitative tightening (QT) moves in emerging markets than further rounds of quantitative easing (QE) in the US and Britain.
Also, as an aside, we mentioned that the threat from currency devaluation wars in the west could be small-fry in comparison. Read more
China and the US have the basis for an agreement at the summit of the Group of 20 leading nations next month on setting targets to cut trade imbalances, an adviser to the Chinese central bank has told the FT. Li Daokui said the debate had moved from the “surface issue” of nominal exchange rates to “talking about the substance of rebalancing world trade” following the weekend’s G20 summit in South Korea. The comments suggest Chinese support is building for US proposals for setting limits on current account surpluses and deficits at around 4 per cent of GDP, which were dismissed by developed-world export economies at the summit.
US officials headed to this weekend’s G20 summit in South Korea are keen on a proposal to set current account targets to control the rise of large surpluses in emerging markets — and large deficits at home, the WSJ reports. But it’s exporters in the developed world that have been most cool on the idea, with Japan calling numerical targets ‘unrealistic’ and Germany also on the attack. Reuters carries details of Treasury Secretary Tim Geithner’s letter to G20 members calling for current accounts to be overseen by the IMF. There’s another problem, notes Bloomberg — even if a deal is reached, G20 members have a terrible track record of implementing reforms they’ve agreed upon.
The Reserve Bank of India warned on Tuesday that volatile capital flows threatened to increase pressure on the country’s balance of payments, which is recording the widest current account deficit among large emerging economies, the FT reports. Analysts identify the current account deficit – which will put downward pressure on the Indian rupee – alongside double-digit inflation as the biggest challenges for the Indian economy. The Reserve Bank of India said on Tuesday that the country’s current account deficit had grown to 2.9 per cent in 2009-10 from 2.4 per cent in the previous year. One reason, the central bank said, for the deterioration in the balance of payments was a decline in an “invisible surplus”, caused in part by falling revenues to India’s prized outsourcing sector.
Paging Martin Wolf. Given recent coverage of global imbalances stalking the market and, uh, teenager-backed bonds on FT Alphaville, here’s an intriguing Goldman note on the role of demographic factors in future current account imbalances.
Intriguing, because the imbalances look like they’re going to get a bit sharper, much sooner — and with a much more middle-aged appearance. Read more
Moving back into the realm of scary figures, a new report by Peterson Institute director Fred Bergsten predicts US net foreign debt could be headed towards $50,000bn or beyond and as much as 100 per cent of GDP as soon as 2030. That at least, writes Bergsten, will be the case if long-term fiscal consolidation is not achieved soon.
In the event the US continues on its current path, high interest rates and ultimate dollar weakness will become increasingly inevitable. Read more