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Global imbalances – where are they and do they matter?

William R WhiteHead of the Monetary and Economic DepartmentBank for International Settlements, Basel

Slides prepared for the Chatham House Conference on Global Financial ImbalancesNew York, 24 April 2006

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Four sections

Everything is interrelated The facts What are people worried about? Should they be worried?

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Everything is interrelated

(S-I) = (X-M) = CF = (M*-X*) = (I*-S*) External imbalances reflect internal imbalances Should they be worried?

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The facts

the US trade deficit is huge the trade counterparties are diverse the US also borrows to lend the sources of finance are diverse but changing

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What are people worried about?

a smooth adjustment is possible, but not inevitable

problems of factor adjustment protectionism impatience in financial markets

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Should they be worried?

a current account perspective a currency share perspective a financial problem needing a real solution

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No problem from a current account perspective? three reasons why strong US productivity growth

helps the “savings glut” hypothesis the valuation bonus for the US dark matter

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But counterarguments are convincing troubling facts and the productivity argument foreign dissaving with the US at full employment the valuation loss for foreigners even less than meets the eye

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No problem from a currency share perspective? private sector holdings of dollar liabilities public sector holdings of dollar liabilities former much larger, but influenced by the latter

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Private sector holdings not a problem? no dollar overhang home bias is big but declining moderate increases in rates provide adequate

support for dollar

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But counterarguments are convincing moderate covering could have big effects declining home bias cuts two ways low domestic rates support spending and

imports

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Public sector holdings not a problem? no dollar overhang (ex Japan) the Bretton Woods II hypothesis the world needs the liquidity

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But counterarguments are convincing the dollar “bloc” is getting smaller vendor financing is convenient, not sustainable more global liquidity creates more problems than

its cures

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Conclusions

do global imbalances matter? arguments both ways, BUT mean-reversion is more common than not