The US, China, and global imbalances

Although there have been surplus and deficit nations in the world for some time, the magnitude of the so-called global imbalances in the 2000s provided the macroeconomic backdrop to the worst financial crisis in nearly a century. The key players are the United States and China, but the global macroeconomic imbalances involve many other emerging economies. Although the genesis of the financial crisis is much more complex and has to do with financial innovation and deregulation, this paper examines the role of global macroeconomic imbalances. It argues that the reserve currency effect of the US dollar alongside an acceleration of global imbalances in the 2000s meant that the reserve accumulation of China and other large surplus countries contributed to an unsustainable level of liquidity in the US economy which fuelled the housing boom, whose collapse in 2007 was a trigger in the ensuing global recession and the subsequent global financial crisis. The findings point to the importance of monitoring global capital flows associated with the US dollar's reserve currency role in the context of persistent global imbalances as part of the G20’s efforts to coordinate global governance of markets.