“Again? Didn’t we just have this debate?” This is how the opening chapter of a collection of essays published by the Centre for Economic Policy Research, on “The New Global Imbalances”, starts. Yes, we did. We did so in the 1980s, in the 2000s and now, once again, in the 2020s.Once roughly every 20 years, it appears, the issue comes to the fore. This is so for two good reasons. One is that current account imbalances drive protectionist sentiment. The other is that they are harbingers of financial crisis. In the 1980s, protectionist sentiment rose against Japan, which is also where the financial crisis struck. In the 2000s, the era of “the China shock”, protectionism began to rise against China and a financial crisis hit the western world. In the 2020s, the protectionism is already here, in the US above all. But the financial crisis is not — or at least not yet.
The view of many economists today is that if a crisis is going to strike, it is likely to be triggered in the US. Thus the authors of the chapter quoted above, Beatrice Weder di Mauro and Jeromin Zettelmeyer, state that “the stock of external liabilities of the central country in the global financial system is already high and projected to rise further. At the same time, asset managers hold increasingly concentrated exposures, equity valuations are stretched, and signs of investor nervousness are emerging, with greater efforts to hedge risk.” In other words, be afraid, be very afraid.
So, how similar are today’s conditions to those of two decades ago? What might go wrong? What should be done? How might today’s situation end?