The case against persistent global imbalances
Any one of 10 confidence-denting events that started in 2014 - if left to fester - is sufficiently dire to potentially trigger a new financial meltdown.
I ENJOYED reading professor Joergen Oerstroem Moeller's insightful recent article on global imbalances (BT, Dec 3). However, I must respectfully disagree with my dear friend's suggestion that persistent global imbalances may not be such a bad thing for the global economy. True, if global citizens are aware of the implications of persistent global imbalances, governments around the world will be pressured to do everything conceivable to avoid highly negative potential outcomes, but that is not a good case for complacency.
The classic argument is that the Chinese and Japanese governments are incentivised to keep buying US Treasury bonds, to avoid hurting US dollar-denominated assets that they are already holding. With the recent scrapping of the 20,000 yuan (S$4,300) daily conversion limit, the Chinese yuan is currently in some form of semi-convertibility, with free floatation being the only eventual outcome. However, please don't expect the Chinese to recycle indefinite amounts of US dollars to buy US Treasuries through their sterilisation programmes. China is different from Japan: the Chinese have pent-up domestic demand for US dollars in order to pay for children's school fees and to invest in overseas assets.
What if the following happens? The US is surprised by a large-scale natural or man-made disaster. That hurts global confidence in US economic resilience and therefore the US dollar. Pundits finally offer a credible currency alternative - say, one linked to precious metals. Such an outcome may not be far-fetched; reportedly, ISIL (Islamic State in Iraq and the Levant) is beginning to issue gold dinars.
KEYWORDS IN THIS ARTICLE
BT is now on Telegram!
For daily updates on weekdays and specially selected content for the weekend. Subscribe to t.me/BizTimes
Columns
‘Competition for talent’ a poor excuse to keep key executives’ pay under wraps
OCBC should put its properties into a Reit and distribute the trust’s units to shareholders
Why a stronger US dollar is dangerous
An overstimulated US economy is asking for trouble
Too many property agents? Cap commissions on home sales
Time to study broadening of private market access