World economic recovery driven by global imbalances

The catastrophic economic downturn that began two years ago was supposed to shake up the global economy, ending an era in which Americans consumed too much and saved and exported too little.

But the recovery is being driven by a return to the very global imbalances that were a major cause of the crisis. Americans’ savings rates have fallen over the past year, imports are rising faster than exports, and countries around the world are again turning to Americans to be the consumers of last resort.

“Despite all the good words and good intentions, I’m afraid we’re going back to the same conditions that led us into this mess to begin with,” said C. Fred Bergsten, director of the Peterson Institute for International Economics.

That’s partly because countries around the world view those old ways, while dangerous over the long term, as the quickest option to power out of the deep economic decline. For China, Japan and Germany, that means exporting vast volumes of goods, saving too much and spending too little; for the United States, and to varying degrees Britain and other European nations, it is the reverse.

These trends are deeply ingrained in countries’ policies and individual decisions by their citizens, such as the lack of a social safety net in China that causes people to save more and the mortgage-interest deductions in the United States that encourage people to take on more debt.

World leaders have pledged to guide the global economy away from those imbalances. Just this week, President Obama renewed his call for a doubling of U.S. exports. But that has been made more difficult given that the value of the dollar has risen 7.5 percent against other major currencies this year, making American exports more expensive.

Meanwhile, leaders in Germany and Japan have turned their focus to reducing budget deficits, but the rest of the world would benefit if those countries spent more aggressively, increasing their consumption.

The United States has been like a customer who outspends his paycheck by receiving store credit. The store — in this case, China, which buys vast quantities of U.S. Treasury bonds — essentially funnels its profit back to the customer in the form of more credit. Everybody is better off for a while; the customer gets more stuff, and the store does more business.

But that relationship can’t go on forever. Eventually, the customer owes more money than he can pay, and the whole arrangement collapses. In the years before the financial crisis, it was that risk — of a collapse in the value of the dollar and of U.S. government securities — that kept many economists up at night.

Many had concluded that the crisis would shock the system into a fundamental change.

“The growth model that has been in place over the past 10 years — where excess savers around the world, namely in Asia, allow us to live beyond our means, namely by buying products from those places — that model is broken, and it’s not coming back,” Tim Adams, a Treasury Department official in the George W. Bush administration, said in congressional testimony in early 2009.

For a time that prediction seemed to be coming true, as the gap between spending and income narrowed. The U.S. savings rate, which was less than 2 percent of disposable income before the crisis, spiked to 6.4 percent in May 2009, as Americans chose to hoard cash rather than spend it, largely out of fear. But in the year since, spending has risen faster than incomes, and the savings rate has edged back down to 4 percent.

At first glance, Americans seem to be cutting back on their debts. Total household debt has fallen 2.7 percent, or $374 billion, since peaking in the second quarter of 2008. But, as the Wall Street Journal recently noted, U.S. banks and lenders have written off almost exactly the same amount of loans as unrecoverable. That means, on balance, that Americans are not paying down what they owe in any meaningful way.

The broadest measure of the gap between savings and consumption, known as the current account deficit, was about 5 percent of total economic output before the crisis in 2007. It shrank to 2.9 percent last year as U.S. consumers cut back and saved more. But based on current trends, the International Monetary Fund now expects that measure to climb back to 3.3 percent this year and to 3.6 percent in 2013.

China’s current account surplus, by contrast, fell from 11 percent in 2007 to 5.8 percent last year. But as the Chinese return to their high-saving ways, this surplus of income over spending is forecast to rise to 8 percent in 2015.

In the United States, policies to deal with the economic crisis have contributed to the trend: deficit spending on government stimulus programs, incentives to buy automobiles and various subsidies for borrowing money to buy a house. China, meanwhile, is continuing to encourage its exports by keeping its currency cheap, though Beijing said last month that it could allow a gradual adjustment of the value.

This problem of global imbalances was high on the agenda when leaders from the world’s 20 largest economies met late last month in Toronto. But their joint statement dealt with the issue only in vague terms, promising to seek “strong, sustainable and balanced growth.” There was no specific agreement on how governments would do this.

The recent financial tremors in Europe could aggravate the imbalances further. Some European countries have responded to the debt crisis by slashing government spending and reducing consumption. Germany, the continent’s largest economy, was already producing more than it consumed, and its move toward austerity could reduce demand for American products just as the United States is pushing to expand exports.

World leaders trying to grapple with these issues face a clash between what is best for the world economy in the long run and the immediate interests of their respective countries. The risk: that the seeds of the next crisis are already in the ground.

“These imbalances weren’t accidental,” said Robert Shapiro, chairman of the economic advisory firm Sonecon and head of the globalization initiative at think tank NDN. “They solved large political and economic problems for a lot of countries and were the result of successful political arrangements. That’s why they’re so hard to untangle.”