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Imbalance of Powers

Author: Brad W. Setser, Senior Fellow and Acting Director of the Maurice R. Greenberg Center for Geoeconomic Studies
April 21, 2009
Foreign Policy


Many have pointed to Sept. 15, 2008, as the day the global economy fell off a cliff. That was the day Lehman Brothers declared bankruptcy, sending equity markets into a tailspin and freezing up credit around the world.

But the global economy wasn't in great health prior to Lehman's crisis -- and we have yet to fix all of the structural problems that helped put us where we are today. Prior to the crisis, U.S. households saved too little and borrowed too much. Conversely, many of the United States' creditors consumed too little and saved too much. Asia and the oil-exporting countries were simultaneously running large trade surpluses (that situation is unusual: a rise in oil prices usually reduces the surplus of oil-importing East Asia). These combined large surpluses also necessarily implied large deficits elsewhere in the global economy. On the whole, money was flowing uphill, from emerging economies to advanced economies, from the poor to the rich, and from countries offering high financial returns to countries generally offering low returns.

The U.S. trade deficit, to be sure, reflected the United States' own excesses, as financial and political leaders alike turned a blind eye to a housing bubble. Nor did U.S. regulators prevent financial leverage from rising as investors sought to maintain returns as yields fell.

But America wasn't solely to blame. A host of emerging economies maintained policies -- such as China's de facto dollar peg -- that pushed up their trade surpluses and thus their capacity to finance the United States' deficit.

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