Article originally in the Financial Times. Other articles .
Martin Wolf is the main economic commentator of the Financial Times.
“Consum is the exclusive goal and the motive of all production,” Adam Smith teaches us. It is difficult to think of what other meaning could make production. Consumption must also be a motive of international trade. But what happens if the key players seem not to believe? The world economy will go wrong.
We must start with the claim that is the basis of John Maynard Keynes economy: The realized consumption mobilizes potential savings. As he further argued, there is no reason to think that this consumption will occur naturally. He called it a “paradox of dispute”. Maintaining high levels of production may require intervention by the state.
Excessive savings no longer absorb investments
Structural surplus savings in economies such as China, Germany and Japan are now balanced (and hence mobilized) above the country with the highest creditworthiness, the United States, and in a lesser extent in Britain. The numbers are stunning. Only these three economies in 2024 had a surplus in a current account balance of $ 884 billion (€ 780 billion).
The surpluses in the TOP 10 countries were $ 1.568 trillion (1.383 trillion euros). Excesses can only exist if there are deficits. Thus, the United States showed a deficit on a current account balance of $ 1.134 trillion (one trillion euros), with an additional contribution of $ 123 billion (€ 108.5 billion) from Britain. The election of Donald Trump is partly a consequence of this fact.
Strangely, however, excessive savings from surplus countries are not absorbed by investments in dynamically developing countries as the end of the 19th century. Instead, they are balanced by the debt of the world’s richest economy.
In addition, at least since the global financial crisis in 2008, these loans to financing the private sector, but governments do not serve. Before the crisis, domestic consumption was mostly powered by a real estate bubble. It has not happened exclusively in the United States, although they have long been the world’s largest debtor.
In the case of Britain, as well as in the euro area, countries with large deficits in the balance of the current account in front of the financial crisis were indebted thanks to real estate bubbles (in Ireland and Spain) or by fiscal deficits (in Greece). When the bubbles burst and collapsed financial systems, the result was almost everywhere huge fiscal deficits.
Industry is also of political importance
The deficit countries are quite understandably dissatisfied with such an arrangement. Yes, they can spend more than their aggregate income, but they are far from grateful. If for nothing else, then because the country with a large business deficit consumes more tradable goods and services than produces. Therefore, industrial production is less than in countries with surplus countries in countries with deficit.
This fact, pointed out by Professor at the University of Beijing Michael Pettis, explains why trade protectionism is growing in the United States. Whatever chaotic and irrational, Trump’s business war is, its origin is not difficult to reveal: industrial production depends both politically and economically.
Unfortunately, this condition is not advantageous even for countries with surplus savings, which is an example of Japan. Under the pressure of the United States and in an effort to reduce surpluses in the current account balance in the 1980s, it introduced an ultra -free monetary policy to increase domestic demand. The result was a real estate bubble.
When it burst in 1990, Japan experienced a financial crisis. Anyway, weak domestic demand caused deflation and huge fiscal deficits. Basically, this has never been recovered. It is therefore not surprising that the Japanese state debt racked from 63 percent of GDP in 1990 to 255 percent last year.
Too much good harms
Similarly, after the 2008 financial crisis, China had to remove its extreme surpluses. After 2008, she also inflated a huge real estate bubble and lending and investing flourished. It is now experiencing the consequences, ie weak domestic demand, low inflation and large fiscal deficits.
Germany partially protected membership in the euro area. But also the financial crisis in the euro area was a natural consequence of huge surpluses. The rest of the euro area subsequently solved its post -crisis problems by imitating Germany. It was replaced by a balanced external balance by exporting capital.
The biggest problem of Trump’s approach to the international economy is that it focuses on the symptom, a trade deficit of the United States, trying to eliminate unpredictable and irrational duties. Apparently the harmful consequences of this procedure (at least temporarily) have alleviated a recent agreement with China, which led to a decline in duties.
But without macroeconomic rhubals, US trade deficits will continue to persist. A prerequisite is to cut the American fiscal deficit, which must be accompanied by changes in policy (especially in China) towards reducing surplus savings. Savings are a good thing. But even too good occasionally harms.
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