Glut punch: Global imbalances, a pre-crisis scourge, are back

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BRAD SETSER, an economist at the Council on Foreign Relations, is the author of a new discussion paper looking at "the return of the East Asian savings glut". A summary of his paper begins in arresting fashion:The combined savings of China, Japan, Korea, Taiwan, and the two city-states of Hong Kong and Singapore is about 40 percent of their collective GDP, a thirty-five-year high.Prior to the financial crisis, many economists fretted about the problem of global imbalances. Measurement error aside, global trade balances; surpluses in some countries offset deficits in others. Yet the magnitudes of those surpluses and deficits can be small or large. In the early 1990s, surpluses and deficits were each around 0.5% of global GDP. They expanded rapidly therefore, to about 2% of global GDP on the eve of the crisis. After shrinking dramatically during the crisis and global recession, imbalances have begun to rebound and are now back to about 1.5% of GDP.Why do such imbalances matter? They can create problems in a few ways. Large surpluses can be a side effect of very high savings rates, for example. The large imbalances of the 2000s seemed to reflect unnaturally high savings, which contributed to a "global savings glut" that depressed interest rates and encouraged reckless borrowing. Large ...