herbert grubel professor of economics (emeritus), simon fraser university senior fellow, the fraser...
TRANSCRIPT
Herbert GrubelProfessor of Economics
(Emeritus), Simon Fraser University
Senior Fellow, The Fraser Institute
Presentation at the III Astana Economic Forum, Kazakhstan, on
July 2, 2010
Competing Propositions
Recession Caused by
1.Excessively easy US Monetary Policies
2.Current Account Imbalances of some countries, used to buy securities for Central Bank Reserves Sovereign Wealth Funds
Importance of Issue
Once Recession has ended andUS monetary policy is flawless:
If problems were caused by imbalances and they continue:
Imbalances will sooner or later result in another global financial crisis
Note Historic ParallelGlobal economic crisis during 1970s, widely
seen as due to “recycling of petro-dollars”: Energy producers have large payments surpluses,
which they deposited with banks in industrial countries
Commercial banks lent to developing countries Developing countries ended up unable to service
debts
Great Recession of 2007-09 due to: Some key countries and energy producers run large
payments surpluses Central Banks and Sovereign Wealth Funds of these
countries bought US financial debt instruments US issuers of debt instruments ended up unable to
service debts
Official Foreign Exchange Reserves(end of 2008)
Country US$ billion
China 2,243Japan 1,031Russia 387India 248
South Korea 201Brazil 201
Hong Kong 183Singapore 166
Algeria 138Germany 133
Others 2,469 Total 7,400
Assets under Management, largest Funds (2008)Country US$ billion Source
Abu Dhabi Investment Authority (UAE) 875
Commodities
SAMA Foreign Holdings (Saudi Arabia) 433
Commodities
Government of Singapore Investment Corp 330
Taxation
SAFE Investment Company (China) 312
Taxation
Government Pension Fund of Norway 301
Commodities
Kuwait Investment Authority 265
Commodities
National Welfare Fund (Russia) 225
Commodities
China Investment Corporation 200
Taxation
Hong Kong Monetary Authority Invest. Portfolio 173
Taxation
Temasek Holdings (Singapore) 134
Taxation
Assets under Management, smaller Funds (2008)Country US$ billion Source
Investment Corporation of Dubai 82
Commodities
National Social Security Fund (China) 74
Taxation
Qatar Investment Authority 60
Commodities
Libyan Investment Authority 50
Commodities
Revenue Regulation Fund (Algeria) 47
Commodities
Australian Future Fund 44Taxation
Kazakhstan National Fund 38Commodities
Brunei Investment Agency 30Commodities
Korea Investment Corporation 30
Taxation
Alaska Permanent Fund 29Commodities
Other 168
Total All Funds 3,900
Total Size of Assets Held in 2008
Assets held by central banks and sovereign wealth funds:
$11.3 trillion Perspective:Total US federal debt held by the
public$6.1 trillion
Are Global Surpluses Good or Bad?
In theory, they are good: They represent increases in global
savingsThey result in lower interest rates, which
lead to More InvestmentHigher Economic Growth
In fact they are bad because:They flowed into one country only (US)They have become too large
Why US Inflows and Problems?China and commodity producers had
exchange rates:
Fixed against US dollarFloating against Euro
Asymmetry of Imbalances:
Accumulation of assets has no limitsSize of debts is limited by ability to service
them
US Monetary Policy in PerspectiveTrue: Easy monetary policy enabled the
maintenance of surpluses by China and commodity exporters
But: Tight US monetary policy would have led to global recession unless controlled economies would have reduced surpluses and Europe and Japan had run deficits and sold financial assets to surplus countries
Questionable: Postulated adjustments Fact: US monetary policy enabled very rapid
economic growth in all countries 2003-07
Policy ImplicationsFuture economic and financial
stability requires the prevention of large and lasting current account imbalances, which can be achieved through:
Reduction of trade surplusesCurrency appreciationIncreased domestic spending on consumption and
investment
If imbalances persist, need sharing of deficits among Euro Area, Japan and USSupervision of IMF, BISVoluntarily
Optimistic Outlook for Needed Policies?
China moves in needed direction:Increase in value of yuan Increases in wages and domestic consumption
Foxconn and Toyota episodes, more to come?
Prospects for significant reduction in surpluses of energy producers??Development of alternative supplies in user
countriesMore domestic spending (investment) in surplus
countriesBut: Offsetting growth in demand from China,
India and other rapidly growing countries