Extract

What is the scale of current global financial and trade imbalances, how did they arise, and what are their implications? Net global imbalances in relation to underlying national and global gross domestic product (GDP) rose erratically from the end of World War II, hit about 2 percent of global GDP in 1980, peaked at roughly 6 percent of global GDP in 2006, and then, consequent to the global financial crisis, receded to a still unsustainable 4 percent of global GDP in 2012. Peak imbalances were roughly on the order of those present just before World War I, at the height of the first period of post-industrial revolution globalization. These net imbalances conceal even larger gross flows of dubious economic utility. Because imbalances are ultimately recorded as assets and liabilities, growing net imbalances can and have cumulated, from roughly 50 percent of global GDP in 1995 to about 150 percent of global GDP in 2011, and absolutely from $15 trillion to $150 trillion. Specific constellations of domestic power rather than 'natural' economic outcomes drove the sustained and substantial global imbalances of the 2000s. These imbalances reflect the structure of political power globally and domestically in a few key countries as much as they reflect underlying economic activity in those countries. Put simply, the United States (US) dollar's role as an international reserve currency interacts with politically generated weak domestic demand in China, Germany, and Japan to produce global and intra-European Union imbalances.