The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy - Updated Edition

by Michael Pettis, Michael Pettis (Preface by)

Overview

How trade imbalances spurred on the global financial crisis and why we aren't out of trouble yet

China's economic growth is sputtering, the Euro is under threat, and the United States is combating serious trade disadvantages. Another Great Depression? Not quite. Noted economist and China expert Michael Pettis argues instead that we are undergoing a critical rebalancing of the world economies. Debunking popular misconceptions, Pettis shows that severe trade imbalances spurred on the recent financial crisis and were the result of unfortunate policies that distorted the savings and consumption patterns of certain nations. Pettis examines the reasons behind these destabilizing policies, and he predicts severe economic dislocations that will have long-lasting effects.

Demonstrating how economic policies can carry negative repercussions the world over, The Great Rebalancing sheds urgent light on our globally linked economic future.

Product Details

ISBN-13:	9780691163628
Publisher:	Princeton University Press
Publication date:	10/26/2014
Edition description:	Updated edition with a New Preface
Pages:	256
Sales rank:	886,564
Product dimensions:	5.50(w) x 8.40(h) x 0.70(d)

About the Author

Michael Pettis is professor of finance and economics at Peking University, a senior associate at the Carnegie Endowment, and a widely read commentator on China, Europe, and the global economy. He is the author of The Volatility Machine: Emerging Economies and the Threat of Financial Collapse.

Table of Contents

CHAPTER ONE Trade Imbalances and the Global Financial Crisis 1

• Underconsumption 4
• The Different Explanations of Trade Imbalance 6
• Destabilizing Imbalances 9
• We Have the Tools 11
• Why the Confusion? 14
• Some Accounting Identities 17
• The Inanity of Moralizing 19
• The New Economic Writing 22

CHAPTER TWO How Does Trade Intervention Work? 26

• Trade Intervention Affects the Savings Rate 29
• Currency Manipulation 32
• Exporting Capital Means Importing Demand 34
• What Happens If China Revalues the Renminbi? 37
• Wealth Is Transferred within China 40
• Does China Need a Social Safety Net? 42

CHAPTER THREE The Many Forms of Trade Intervention 47

• How Changes in Wealth Affect Savings 50
• Wage Growth 52
• Trade Policy as the Implicit Consequence of Transfers 55
• Financial Repression 58
• Higher Interest Rates and Household Wealth 61
• Do Higher Interest Rates Stimulate or Reduce Consumption? 64
• Currency versus Interest Rates 66

CHAPTER FOUR The Case of Unbalanced Growth in China 69

• What Kind of Imbalance? 74
• Growth Miracles Are Not New 78
• The Brazilian Miracle 81
• Powering Growth 84
• Paying for Subsidies 87
• Limits to Backwardness 89
• The Trade Impact 92
• A Lost Decade? 94
• Can China Manage the Transition More Efficiently? 96
• Some More Misconceptions 97

CHAPTER FIVE The Other Side of the Imbalances 100

• Can Europe Change American Savings Rates? 103
• How Does Trade Rebalance? 106
• Globalization Is Not Bilateral 109
• The Global Shopping Spree 113
• Trade Remains Unbalanced 115

CHAPTER SIX The Case of Europe 119

• The Mechanics of Crisis 122
• Too Late 125
• German Thrift 128
• Forcing Germany to Adjust 131
• Two-Sided Adjustment 133

CHAPTER SEVEN Foreign Capital, Go Home! 136

• Swapping Assets 139
• It's about Trade, Not Capital 142
• Trade Imbalances Lead to Debt Imbalances 144
• The Current Account Dilemma 147

CHAPTER EIGHT The Exorbitant Burden 150

• Why Buy Dollars? 153
• It Is Better to Give Than to Receive 157
• Foreigners Fund Current Account Deficits, Not Fiscal Deficits 161
• Rebalancing the Scales 163
• When Are Net Capital Inflows a Good Thing? 166
• Can We Live without the Dollar? 168
• Why Not Use SDRs? 172
• An American Push Away from Exorbitant Privilege 174

CHAPTER NINE When Will the Global Crisis End? 178

• Transferring the Center of the Crisis 180
• Reversing the Rebalancing 183
• Some Predictions 185
• The Global Impact 191

Notes 197

Index 205

What People are Saying About This

From the Publisher

"Through the past decade of China's financial and strategic emergence, Michael Pettis has been a source of unfailing common sense about the possibilities and limitations of the Chinese model. Now he has put his analysis and recommendations into one concise book. I highly recommend reading and reconsulting his book to put the daily flow of China news into perspective."—James Fallows, author of China Airborne

"This is a brilliant book, one that absolutely must be read by all who are concerned with globalization's future. Michael Pettis debunks the reigning conventional wisdom about international trade, finance, and globalization, and provides the most clear-eyed, unbiased, and unvarnished insights into how the Chinese economy works. From Chinese savers to Greek debtors to American bankers, Pettis shows how we are all connected—and what to prepare for on the road ahead."—Clyde Prestowitz, author of The Betrayal of American Prosperity

"Michael Pettis has written an essential guide to the macroeconomic imbalances that bedevil today's global economy. We ignore his message at our peril."—Dani Rodrik, author of The Globalization Paradox

"This is a profoundly interesting exploration of the causes of the trade and capital imbalances that produced the 2008 financial crisis. Michael Pettis argues that the structural gap between China's domestic consumption and production is the central reason for its pursuit of export-led growth through currency undervaluation. His analysis focuses valuable attention on the deep domestic reforms required in all the major trading countries for the 'great rebalancing' of their international accounts—and the avoidance of continuing crises."—Robert Skidelsky, author of Keynes: The Return of the Master

Editorial Reviews

"Demonstrating how economic policies can carry negative repercussions the world over, The Great Rebalancing sheds urgent light on our globally linked economic future."

World Book Industry

"[F]ascinating reading."

BizEd

"Policymakers should heed the macroeconomic laws that Pettis articulates. His text is a sound introduction to global balance-of-payment mechanisms, using the financial crisis as the ideal case study."

Survival

"[The Great Rebalancing] is original and quite convincing, and coherently challenges conventional accounts."

Choice

"[Michael Pettis is] a brilliant economic thinker."—-Edward Chancellor, Wall Street Journal

From the Publisher

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. (Feb.)

Publishers Weekly

This is a dense and well-argued book. . . . It will be read with interest by the large and growing community that follows China's economy.

South China Morning Post - Mark O'Neill

I've been waiting for this book for over 10 years. . . . Anyone who wants to understand international economics better will benefit from this book. I cannot recommend it more highly.

Seeking Alpha - David Merkel

With much pleasure, I highly recommend Michael Pettis' newest book The Great Rebalancing. . . . Michael Pettis has taught me most of what I know about global trade. I also happen to believe he is the world's foremost expert on China in relation to trade and global macro events. I give two thumbs up to The Great Rebalancing.

Global Economic Analysis - Mike "Mish" Shedlock

[Michael Pettis is] a brilliant economic thinker.

Wall Street Journal - Edward Chancellor

This is a book that should be read by: (a) politicians, central bankers and anybody else involved in macroeconomic policy; (b) all economists; (c) all students of economics; and (d) everybody else. The Great Rebalancing: Trade, Conflict and the Perilous Road Ahead for the World Economy by Michael Pettis is as sharp and clear as a cut diamond in its analysis of the continuing global imbalances. The author brings logic, accounting identities and clarity of thought and language to bear on the issue of prospects for the global economy, putting most other commentators into the shade.

Enlightened Economist - Diane Coyle

The Great Rebalancing is probably one of the clearest, most elegant and logically written explanations of world trade, including both how policies affect trade and how trade affects economies. . . . [T]his is not just a China book, but a book encompassing some of the biggest economic and financial questions of our time. The persuasive, clear and well-reasoned arguments behind many of the seemingly unorthodox ideas in the book will make it both pleasing and nicely unsettling for many readers. Hopefully its message will be heard amongst policymakers before some of the more disturbing predictions become realities.

Diplomat - James Parker