Global Imbalances and Financial Crisis: A dimension of the financialization question

27 Jul

We have attempted to argue before that financialization is about more than just the ‘rule of the financial class.’ That, in a way, the idea of an all powerful financial class misses out on some of the other structural problems with current economic organization as a whole. That, for instance, was a point raised in yesterday’s guest post by Daniel Ben-Ami. One dimension of this background, economic structure is the issue of global imbalances. Some argue that the very large current account (ie trade) deficit in the United States, mirrored by the very large current account surpluses in China, lie at the heart of the financial crisis. Over the 2000s, the Chinese bought more and more T-bills, which helped finance American consumption. Seemingly bottomless demand for American debt kept interest rates lower than they otherwise would have been. Low interest rates fueled borrowing at every level of the American economy, it financed American consumption of cheap Chinese goods, and made possible widespread speculation with essentially forced Chinese savings.

A recent paper by Claudio Borio and Piti Disyatat at VOX EU challenges this account on the grounds that “global imbalances reveal little about financing patterns.” One of their key claims is that the global imbalances argument is about net flows – outflows-inflows – rather than gross cross-border flows. When we focus on gross cross-border flows, the story appears not to be about US-Chinese global imbalances, but complex inter-relations between advanced economies: “the bulk of the spectacular expansion of global gross capital flows (inflows plus outflows) since the late 1990s, from around 10% of world GDP in 1998 to over 30% in 2007, has been driven by flows between advanced economies. Flows from, or, between, emerging markets have been much smaller.” Gross capital flows from Europe to the US, especially the UK, massively outstripped Chinese, and it was the seizing up of the former that correlated with the crisis.

We are still digesting the implications of this argument, but it does spur some thoughts about financialization. First, even if global imbalances are part of the puzzle, Borio and Disyatat’s paper suggest a lot had to do with the regulatory apparatus(es) and global financial architecture between and amongst advanced economies. Second, it reminds us that the growth of financial activities in advanced economies is not just larger than can be explained by Chinese savings, but well predates the growth of global imbalances between China and the US. After all, China only became a serious holder of US debt in the 2000s, but the growth in debt-financed consumption, rolling asset-bubbles, and increased financial activity by non-financial companies – to name a few features of financialization – began in the mid-1970s. To supply just one graph illustrating a dimension of the trend, taken from this 2008 article we can see that it was in the early 1980s that dramatic indebtedness began:

It is quite likely that the growth of global imbalances could have dramatically exacerbated a trend, supplying even more funds for the speculative activity of advanced economies, but the underlying financialization of the advanced economies appears to be something more structural than a change in global imbalances would resolve.

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