close window
Behind the rising swell of current global imbalances is 30 years of an increase in capital – both trade flows and the accompanying financial flows – moving across international borders. According to Stephen Cecchetti, these ever-increasing imbalances cannot remain forever and will eventually lead to price and structural adjustments.
Cecchetti, economic adviser and head of the Monetary and Economic Department at the Bank of International Settlements (BIS), spoke at Gleacher Center on September 27, 2011. The event, part of the Myron Scholes Global Markets Forum, a series hosted by the Initiative on Global Markets, drew more than 200 students, alumni, and faculty.
"It's difficult, I think, to find someone who would protest the increase in international trade," Cecchetti said in his opening remarks for "Global Imbalances: Current Accounts and Financial Flows."
"This openness, and society's attitude toward it, is one of the great successes of the last half of the twentieth century," he said, "and I would also just consider, the fact that protectionism has not been a part of the recent financial crisis is both a victory and a relief."
Cecchetti, who is a member of the executive committee that oversees all operations for BIS, the world's oldest financial institution, made headlines back in August for his presentation "The Real Effects of Debt" at the 2011 Economic Policy Symposium, the premier conference for global central banks, sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole, Wy.
Discussing cross-border financial flows at Chicago Booth, Cecchetti said it is important to distinguish between net and gross flows. Net flows, related to such global imbalances as current account surpluses and deficits, are supported by much larger gross flows, which could be two to three times larger than net flows. These gross flows, "gave rise to international investment positions," Cecchetti explained, "this is US investors buying Asians equities and Asian investors buying US treasury securities." These gross flows result in balance sheets that are significantly larger than net flows and are estimated to approach $100 trillion.
International capital flows, while generally viewed favorably, are often a source of stress in the international community. Even countries with balanced current accounts, Cecchetti said, complain about gross flows, the accumulation of international investment positions. Often, a government's attempt to control these capital flows have caused more harm than good, he added.
The consequences of current account deficits, in which one country spends more than it produces, is what Cecchetti called a relationship of "unhealthy co-dependency." Referencing several graphs, Cecchetti argued that surplus countries, whose growth is lead by exports, often rely on deficit countries, whose growth is spurred by leverage. This situation eventually leads to disaster, Cecchetti said, and a solution to these imbalances requires structural and price adjustments: surplus countries need to increase domestic consumption and deficit countries need to increase domestic savings.
Cecchetti concluded by saying current account deficits were large and rising, and global imbalances would remain, but not indefinitely. Investors deciding to suddenly cease lending to deficit countries, which would lead to disorderly exchange rate adjustments, is a real risk, he added.
"Inflation and deflation are very bad solutions to the problems that we see in trying to address the imbalances in the financial system and keep the system functioning well," Cecchetti said, "the solution instead is normal exchange rate flexibility."
— Kalliope Dimitrakopoulos
Photo by Beth Rooney