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The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy
How trade imbalances spurred on the global financial crisis and why we aren't out of trouble yet
China's economic growth is sputtering, the Euro is under threat, and the United States is combating serious trade disadvantages. Another Great Depression? Not quite. Noted economist and China expert Michael Pettis argues instead that we are undergoing a critical rebalancing of the world economies. Debunking popular misconceptions, Pettis shows that severe trade imbalances spurred on the recent financial crisis and were the result of unfortunate policies that distorted the savings and consumption patterns of certain nations. Pettis examines the reasons behind these destabilizing policies, and he predicts severe economic dislocations--a lost decade for China, the breaking of the Euro, and a receding of the U.S. dollar―that will have long-lasting effects.
Pettis explains how China has maintained massive―but unsustainable―investment growth by artificially lowering the cost of capital. He discusses how Germany is endangering the Euro by favoring its own development at the expense of its neighbors. And he looks at how the U.S. dollar's role as the world's reserve currency burdens America's economy. Although various imbalances may seem unrelated, Pettis shows that all of them―including the U.S. consumption binge, surging debt in Europe, China's investment orgy, Japan's long stagnation, and the commodity boom in Latin America―are closely tied together, and that it will be impossible to resolve any issue without forcing a resolution for all.
Demonstrating how economic policies can carry negative repercussions the world over, The Great Rebalancing sheds urgent light on our globally linked economic future.
China's economic growth is sputtering, the Euro is under threat, and the United States is combating serious trade disadvantages. Another Great Depression? Not quite. Noted economist and China expert Michael Pettis argues instead that we are undergoing a critical rebalancing of the world economies. Debunking popular misconceptions, Pettis shows that severe trade imbalances spurred on the recent financial crisis and were the result of unfortunate policies that distorted the savings and consumption patterns of certain nations. Pettis examines the reasons behind these destabilizing policies, and he predicts severe economic dislocations--a lost decade for China, the breaking of the Euro, and a receding of the U.S. dollar―that will have long-lasting effects.
Pettis explains how China has maintained massive―but unsustainable―investment growth by artificially lowering the cost of capital. He discusses how Germany is endangering the Euro by favoring its own development at the expense of its neighbors. And he looks at how the U.S. dollar's role as the world's reserve currency burdens America's economy. Although various imbalances may seem unrelated, Pettis shows that all of them―including the U.S. consumption binge, surging debt in Europe, China's investment orgy, Japan's long stagnation, and the commodity boom in Latin America―are closely tied together, and that it will be impossible to resolve any issue without forcing a resolution for all.
Demonstrating how economic policies can carry negative repercussions the world over, The Great Rebalancing sheds urgent light on our globally linked economic future.
232 pages, Hardcover
First published December 1, 2012
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Displaying 1 - 30 of 53 reviews
November 11, 2016
To read this book you need some A-Level economics, because the author does not bother to lay it out. Here's the necessary crib:
(1) Y = C + I + G + (X - M)
(2) Ydisposable = S + C
(3) Ydisposable = Y - TAX + TR
(2),(3) => S + C = Y - TAX + TR =>
(4) Y = S + C + TAX - TR
(1),(4) => C + I + G + (X - M) = S + C + TAX -TR =>
(5) (TAX - TR - G) + (S - I) = (X - M)
In plain English, equation (5) says that the budget surplus (tax collected minus transfers minus government spending) plus net savings (savings minus investment) are identically equal to the trade surplus.
It makes sense, of course. Maybe in today's world you should say that the budget deficit plus net dissaving equals the trade deficit, but you get the idea.
You can complicate it a bit more by also including net investment flows, but the above crib is good enough to plough through the book.
There's a reason the author does not have the crib in the margin of every page: he likes to exaggerate. To exaggerate best, he needs to play fast and loose with equation (5). So he states, for example, that a tariff on a necessary good (a good that is imported from abroad but we cannot do without and will not buy any less of after the tariff has been imposed) will AUTOMATICALLY lead to more net exports.
Such a tariff is clearly a tax by another name. Suppose TAX goes up in equation (5). There's more than one ways this can be balanced out:
(i) more government spending G or more transfers TR would do the trick
(ii) savings S could go down, as people who've borne the tax can save less
(iii) fewer goods might be imported to compensate for the tariff
(iv) less capital might be exported
The author axiomatically states that net exports will go up, which corresponds to (iii) and (iv) above but ignores (i) and (ii). It's one of the book's big ideas that a tariff or a currency devaluation does not rely so much on substitution effects as it does on the inevitability of accounting identities. Well, if you cannot explain it in English, if you cannot lay out how the accounting identity comes about, you should not be writing books, frankly.
Regardless, the author knows what he's talking about, and most of the time he gets it right. Especially when he discusses China (comfortably the best chapter and good enough a reason to buy the book) a lot of the alternatives to balance the equation are irrelevant, because the process is managed and choreographed by the Chinese government. And in China the budget surplus / deficit is totally dwarfed by net savings which (as a result) roughly equal net exports. But the inevitability of the conclusions he presents is, quite simply, false. I agree with him a lot more than I disagree. The point is that he is presenting OPINIONS dressed as FACTS.
So do read the book, but arm yourself with the crib. When something seems far-fetched, check.
The other thing I did not enjoy about the book is the idea that Europe will get better only if the Germans become lazy and overpaid like everybody else. If there was only Europe and nowhere else, I'd say "what the heck, that kinda works too, until somebody else decides to get his act together." In a world with 6 billion people, I'm not so sure there's terribly much value in rushing to the lowest common denominator. Besides, our world is increasingly about services, rather than manufacturing.
Overall, the book discusses many important issues and presents a very interesting analysis of what's going on in China. I'm no China expert and I could not possibly comment on whether the analysis is correct, but it's an interesting and plausible perspective. I'm better off for having read the book, but to anybody who decides to buy it I'd recommend that you crib equation (5) above and write it in the margin of every page. Then use it to challenge the author on his most outrageous claims...
Yes, it's true that BUDGET SURPLUS + NET SAVINGS = TRADE SURPLUS, but it does not come about automatically. Economic agents have to make it happen. Maybe nobody told the author his job was to tell us how.
(1) Y = C + I + G + (X - M)
(2) Ydisposable = S + C
(3) Ydisposable = Y - TAX + TR
(2),(3) => S + C = Y - TAX + TR =>
(4) Y = S + C + TAX - TR
(1),(4) => C + I + G + (X - M) = S + C + TAX -TR =>
(5) (TAX - TR - G) + (S - I) = (X - M)
In plain English, equation (5) says that the budget surplus (tax collected minus transfers minus government spending) plus net savings (savings minus investment) are identically equal to the trade surplus.
It makes sense, of course. Maybe in today's world you should say that the budget deficit plus net dissaving equals the trade deficit, but you get the idea.
You can complicate it a bit more by also including net investment flows, but the above crib is good enough to plough through the book.
There's a reason the author does not have the crib in the margin of every page: he likes to exaggerate. To exaggerate best, he needs to play fast and loose with equation (5). So he states, for example, that a tariff on a necessary good (a good that is imported from abroad but we cannot do without and will not buy any less of after the tariff has been imposed) will AUTOMATICALLY lead to more net exports.
Such a tariff is clearly a tax by another name. Suppose TAX goes up in equation (5). There's more than one ways this can be balanced out:
(i) more government spending G or more transfers TR would do the trick
(ii) savings S could go down, as people who've borne the tax can save less
(iii) fewer goods might be imported to compensate for the tariff
(iv) less capital might be exported
The author axiomatically states that net exports will go up, which corresponds to (iii) and (iv) above but ignores (i) and (ii). It's one of the book's big ideas that a tariff or a currency devaluation does not rely so much on substitution effects as it does on the inevitability of accounting identities. Well, if you cannot explain it in English, if you cannot lay out how the accounting identity comes about, you should not be writing books, frankly.
Regardless, the author knows what he's talking about, and most of the time he gets it right. Especially when he discusses China (comfortably the best chapter and good enough a reason to buy the book) a lot of the alternatives to balance the equation are irrelevant, because the process is managed and choreographed by the Chinese government. And in China the budget surplus / deficit is totally dwarfed by net savings which (as a result) roughly equal net exports. But the inevitability of the conclusions he presents is, quite simply, false. I agree with him a lot more than I disagree. The point is that he is presenting OPINIONS dressed as FACTS.
So do read the book, but arm yourself with the crib. When something seems far-fetched, check.
The other thing I did not enjoy about the book is the idea that Europe will get better only if the Germans become lazy and overpaid like everybody else. If there was only Europe and nowhere else, I'd say "what the heck, that kinda works too, until somebody else decides to get his act together." In a world with 6 billion people, I'm not so sure there's terribly much value in rushing to the lowest common denominator. Besides, our world is increasingly about services, rather than manufacturing.
Overall, the book discusses many important issues and presents a very interesting analysis of what's going on in China. I'm no China expert and I could not possibly comment on whether the analysis is correct, but it's an interesting and plausible perspective. I'm better off for having read the book, but to anybody who decides to buy it I'd recommend that you crib equation (5) above and write it in the margin of every page. Then use it to challenge the author on his most outrageous claims...
Yes, it's true that BUDGET SURPLUS + NET SAVINGS = TRADE SURPLUS, but it does not come about automatically. Economic agents have to make it happen. Maybe nobody told the author his job was to tell us how.
January 23, 2015
Wow ... if you want to read a book that blows holes in prevailing economic myths surrounding the current economic crisis, read this book. Simply astounding and written so that a layperson with no economics background can read and understand the author's arguments.
June 18, 2014
The micro foundations delusion debunked
[Through my ratings, reviews and edits I'm providing intellectual property and labor to Amazon.com, Inc., listed on Nasdaq, which fully owns Goodreads.com and in 2013 posted revenues for $74 billion and $274 million profits. Intellectual property and labor require compensation. Amazon.com, Inc. is also requested to provide assurance that its employees and contractors' working conditions meet the highest health and safety standards at all the company's sites.]
This book makes a clear argument by sticking throughout to the fundamental accounting identities that in macroeconomic courses get only a couple of hours of attention and then are set to the side as undergraduate stuff to be forgotten as soon as possible. If you want to learn more, you generally have to turn to old academic treatises written by long-deceased professors.
Thanks to its consistency and epistemological grounding (the accounting identities are true in a very classical, i.e. logic, way), this book turns out to be one of the most anti-neoliberal writings I've ever read, whilst giving the impression of being solidly mainstream. The power of logic over the schyzofrenic, assumption-ridden dynamic stochastic general equilibrium models that attempt to link macroeconomic outcomes to decisions taken at the level of the individual consumer and enterprise, where the basic idea is that it rains because the single water vapour molecules each decided to liquefy.
As in physics more is different, so in economics it should be clear that it is economic policy that inflences the decisions of the mostly rational individual consumers and enterprises, and not the other way round - i.e. it rains because a cold wind made the vapour droplets liquefy.
The book explains the same idea over and over again, addressing the forces behind trade and capital account imbalances from different angles and in different countries and historical contexts. As other reviewers point out, providing a few formulas would have helped, but there's a necessity to the narrative, as the relationships have to be grasped in their context before getting sketched through an equation.
As an example of anti-neoliberal conclusions: the author states in a matter-of-fact way that households pay the price of all financial crises. See how this compares to the standard neoliberal approch posting that households are to blame for any financial crisis as it's their indebtedness that brings about the collapse, every time. (A recent exhibit is provided by this Chicago Booth video on the book "House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again", for Larry Summers "the most important book of 2014": http://m.youtube.com/watch?v=RPhUWaIgX-o ).
More importantly, the book does NOT assume or aims to make you assume that the economy is such a complicated phenomenon that cannot be understood by any human being (quote from the above video: "the crisis is a mystery"). To the contrary, it makes clear that economic forces are very well understood. The fact that they get regularly used to shape the social order by those very ideologists who claim they are beyond our reach is further proof of their simplicity.
[Through my ratings, reviews and edits I'm providing intellectual property and labor to Amazon.com, Inc., listed on Nasdaq, which fully owns Goodreads.com and in 2013 posted revenues for $74 billion and $274 million profits. Intellectual property and labor require compensation. Amazon.com, Inc. is also requested to provide assurance that its employees and contractors' working conditions meet the highest health and safety standards at all the company's sites.]
This book makes a clear argument by sticking throughout to the fundamental accounting identities that in macroeconomic courses get only a couple of hours of attention and then are set to the side as undergraduate stuff to be forgotten as soon as possible. If you want to learn more, you generally have to turn to old academic treatises written by long-deceased professors.
Thanks to its consistency and epistemological grounding (the accounting identities are true in a very classical, i.e. logic, way), this book turns out to be one of the most anti-neoliberal writings I've ever read, whilst giving the impression of being solidly mainstream. The power of logic over the schyzofrenic, assumption-ridden dynamic stochastic general equilibrium models that attempt to link macroeconomic outcomes to decisions taken at the level of the individual consumer and enterprise, where the basic idea is that it rains because the single water vapour molecules each decided to liquefy.
As in physics more is different, so in economics it should be clear that it is economic policy that inflences the decisions of the mostly rational individual consumers and enterprises, and not the other way round - i.e. it rains because a cold wind made the vapour droplets liquefy.
The book explains the same idea over and over again, addressing the forces behind trade and capital account imbalances from different angles and in different countries and historical contexts. As other reviewers point out, providing a few formulas would have helped, but there's a necessity to the narrative, as the relationships have to be grasped in their context before getting sketched through an equation.
As an example of anti-neoliberal conclusions: the author states in a matter-of-fact way that households pay the price of all financial crises. See how this compares to the standard neoliberal approch posting that households are to blame for any financial crisis as it's their indebtedness that brings about the collapse, every time. (A recent exhibit is provided by this Chicago Booth video on the book "House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again", for Larry Summers "the most important book of 2014": http://m.youtube.com/watch?v=RPhUWaIgX-o ).
More importantly, the book does NOT assume or aims to make you assume that the economy is such a complicated phenomenon that cannot be understood by any human being (quote from the above video: "the crisis is a mystery"). To the contrary, it makes clear that economic forces are very well understood. The fact that they get regularly used to shape the social order by those very ideologists who claim they are beyond our reach is further proof of their simplicity.
July 23, 2019
Excellent Book
I read Michael Pettis’ views on FT Alphachat with great zeal but the book blew my mind. It is a must read for gaining a good understanding of macroeconomics and international trade. What especially sets it apart is its relevance to real life rather than theory. Written in 2013, it predicts increase in trade tensions, countries wanting to leave Eurozone and China’s slowing growth. It has certainly helped me update my model of understanding the world and I would highly recommend it to the curious investor.
I read Michael Pettis’ views on FT Alphachat with great zeal but the book blew my mind. It is a must read for gaining a good understanding of macroeconomics and international trade. What especially sets it apart is its relevance to real life rather than theory. Written in 2013, it predicts increase in trade tensions, countries wanting to leave Eurozone and China’s slowing growth. It has certainly helped me update my model of understanding the world and I would highly recommend it to the curious investor.
December 17, 2015
It's uncanny how many of his predictions have since come true.
May 21, 2013
Brilliantly and simply argued analysis on China, the EU and the US. I've been reading Michael's blog for the better part of a decade, so there's not much new in this volume, but it wonderful to have one of his best-developed arguments in one place. Free of jargon and a great entry point for new readers (on China economics or trade and current account matters more generally).
March 8, 2024
One of Pettis' best works in that's its a great culmination of all his work until this moment. Written in such an accessible format and with easy language with many illustrative examples, it's a simple and straightforward read that still incorporates so much economics.
The main idea here is that the global economy is out of balance due to the underlying structural contexts of many economies having moved too far out of their original contexts, and the contexts themselves affecting how things work. One big hole for me is how production that doesn't depend on the goods side can factor in - services, knowledge, information. This is where I feel the book lacks detail, and some of the predictions not turning out exactly could even be explained by this.
Overall a great introduction and summary of the details of Pettis' economic theories and ideas, and very much a recommendation for anyone interested in economics.
The main idea here is that the global economy is out of balance due to the underlying structural contexts of many economies having moved too far out of their original contexts, and the contexts themselves affecting how things work. One big hole for me is how production that doesn't depend on the goods side can factor in - services, knowledge, information. This is where I feel the book lacks detail, and some of the predictions not turning out exactly could even be explained by this.
Overall a great introduction and summary of the details of Pettis' economic theories and ideas, and very much a recommendation for anyone interested in economics.
January 31, 2023
Very interesting analysis.
November 5, 2016
This book was illuminating. I ended up buying the book for reference after reading a library copy. Michael Pettis argues that the global financial crisis of 2008 had its roots in large and persistent “Savings” imbalances.
While I have some Macro Economics 101 background, I have never been strong in the subject. But reading Michael Pettis took my understanding of the Balance of Payments (BOP) mechanisms to a new level. The book provides a simple but powerful framework to understanding savings/trade imbalances and their repercussions.
As a framework for better understanding the 2008 crisis, he starts off explaining three relevant BOP Accounting Identities without using equations. So, in certain parts, I had to re-read the passages a few times (I'm dense, I know) and to Google the equations (they are quite basic, but one would need a quick refresher). But once you remember the Accounting Identities, he shows their application, highlights the relevant cause and effect (highlighting how trained economists have misinterpreted causal relationships) and flags up wrong conclusions by fellow economists. Absolutely eye opening.
Pettis leads the reader to the correct use of these basic BOP Accounting Identities and their second-round effects on the problems caused or faced by China, the Eurozone, and a strong US Dollar, and concludes by making predictions for these three geographies.
That Pettis could consistently apply these simple Identities to analyse complex global events gave me a renewed confidence in interpreting global economic affairs. Clearly one of the best applied economics books in decades.
While I have some Macro Economics 101 background, I have never been strong in the subject. But reading Michael Pettis took my understanding of the Balance of Payments (BOP) mechanisms to a new level. The book provides a simple but powerful framework to understanding savings/trade imbalances and their repercussions.
As a framework for better understanding the 2008 crisis, he starts off explaining three relevant BOP Accounting Identities without using equations. So, in certain parts, I had to re-read the passages a few times (I'm dense, I know) and to Google the equations (they are quite basic, but one would need a quick refresher). But once you remember the Accounting Identities, he shows their application, highlights the relevant cause and effect (highlighting how trained economists have misinterpreted causal relationships) and flags up wrong conclusions by fellow economists. Absolutely eye opening.
Pettis leads the reader to the correct use of these basic BOP Accounting Identities and their second-round effects on the problems caused or faced by China, the Eurozone, and a strong US Dollar, and concludes by making predictions for these three geographies.
That Pettis could consistently apply these simple Identities to analyse complex global events gave me a renewed confidence in interpreting global economic affairs. Clearly one of the best applied economics books in decades.
June 29, 2013
Really illuminating on the way that the global financial/trade imbalances led to 2007 crisis, and why it is so hard to undo these imbalances.
However, Pettis largely ducks the question of WHY these various governments have pursued these policies. Relatedly, he treats countries more or less as unitary rational actors, instead of assessing why these seemingly counterproductive or malicious strategies make sense to particular factions within these countries. Eg
*Allowing American consumers to spend beyond their means served a variety of elite interests from 1990-2010 (in that it tempered anger about rising inequality and social rigidification)
*Huge capital overinvestment in China gave the surplus peasants in the countryside something to do as economic elites enriched themselves and party elites got to indulge their engineering fantasies
*Michael Lewis has written a whole book on why the boom years met divers psychic-political needs in different European countries.
In sum, the book is great on the "how" of the crisis, but less illuminating on the "why" – for that, we need socio-political analysis, not just economic analysis.
However, Pettis largely ducks the question of WHY these various governments have pursued these policies. Relatedly, he treats countries more or less as unitary rational actors, instead of assessing why these seemingly counterproductive or malicious strategies make sense to particular factions within these countries. Eg
*Allowing American consumers to spend beyond their means served a variety of elite interests from 1990-2010 (in that it tempered anger about rising inequality and social rigidification)
*Huge capital overinvestment in China gave the surplus peasants in the countryside something to do as economic elites enriched themselves and party elites got to indulge their engineering fantasies
*Michael Lewis has written a whole book on why the boom years met divers psychic-political needs in different European countries.
In sum, the book is great on the "how" of the crisis, but less illuminating on the "why" – for that, we need socio-political analysis, not just economic analysis.
February 8, 2015
An interesting attempt to analyse current economic challenges and how they are will be resolved in some not too distant future. German growth rates will slow sharply for many years and German banks will take significant losses. Most of peripheral Europe will be forced to abandon the euro and to restructure its debt. China has already taken too long to address its domestic imbalances and it is running out of time. Japan is still struggling with the legacy of its over investment surge in the 1980s. The US is slowly and painfully rebalancing. If it is managed well, China's eventual rebalancing and much slower growth will be positive for Chana and the world, although the benefits to the world will bot be evenly distributed.
Time will tell.
Time will tell.
May 21, 2017
Update: I would like to retract my entire review owing to my incomplete understanding of the causes of disequilibrium in the world economy. This is actually a great book regarding the solutions to solving this but does not make completely clear the causes for it.
An utterly Keynesian approach to the global economy with a special focus on Balance of Payments and the imbalances that exist today. This book could have done with some of the Macreconomics identities laid out beforehand. Interestingly, blame for the crisis is put squarely on the trade surplus countries such as Germany and Japan with the others going more or less scot-free. There were some holes in the arguments that could be picked. Also not very readable as this is in the style of blog posts collated into a book format.
An utterly Keynesian approach to the global economy with a special focus on Balance of Payments and the imbalances that exist today. This book could have done with some of the Macreconomics identities laid out beforehand. Interestingly, blame for the crisis is put squarely on the trade surplus countries such as Germany and Japan with the others going more or less scot-free. There were some holes in the arguments that could be picked. Also not very readable as this is in the style of blog posts collated into a book format.
January 20, 2020
Although there are some occasional mistakes in the book, overall, this is the most logically coherent, succinctly written, and brilliantly delivered piece of work that I have ever read on the discussion of international trade. Highly recommended for anyone who is interested in understanding the nature and underlying fundamentals that lead to international trade imbalances.
March 18, 2014
This is THE best Econ book I have read so far. This Econ101 without "Suppose/Assume". Basic premise takes the Global trade as a closed system and builds its logics. Backtests the logical arguments and then implements them for future events. You will not laugh at this Economist!
January 16, 2022
Despite an interest in macroeconomics, I'm not trained in the field and global balance of trade (BOT) is outside of my wheelhouse. Thus, it is unclear to me if Pettis' frequent use of the word "must" in discussing effects of global BOT is definitional or tautological, and while he includes many examples of how a certain policy in one country may affect another, the "must" seems to be doing a lot of work here- after all, the book was written in 2013 and 10 years later many of the most important predictions have yet to come true imo, though they may eventually..but "must " they?
Some of the big ones:
-nations with large trade surpluses (Germany, China, Japan) cause imbalance to the world BOT by underconsuming domestically which effectively exports their savings abroad. Continued global imbalances contribute to trade tensions = indeed more trade tensions, especially between US and China, have occured though Pettis' call that China would be the last to emerge from the GFC was not correct; neither was the slower China growth, at least not until COVID.
-Germany's continued trade surplus and domestic underconsumption will eventually cause peripheral Europe (PIIGS) to leave the Euro as lack of domestic control over their own currency prevents them from correcting their on economies - all the PIIGS are still in the Euro (Germany and ECB buying their sov bonds).
-Japan effectively moved the private overindebtedness from the 1980s bubble and transferred it to the public sector (debt over 200% of GDP in 2013). Japan needs to reduce debt and increase domestic consumption. = Japan's pubic debt/GDP has risen to over 250% in 2020 and domestic consumption hasn't increased substantially.
-China needs to stop pursuing a trade surplus at all costs and instead of exporting excess savings abroad, it needs to transfer wealth from the state sector to the private sector. = While Xi's Common Prosperity aims to increase household consumption, it isn't being done by reducing state wealth. Excess Chinese savings continue to be exported via BRI/AIIB.
-US is a in a special case because although we have a trade deficit, it's largely a factor of the USD as the primary world reserve currency, as status which effectively is an 'exorbitant burden" rather than the usual "exorbitant privilege." To allow the US to rebalance its BOT, a non-sovereign world reserve currency (SPDR) directed by a supersoverign entity (IMF) needs to be established = not yet.
I think I'll have to revisit this text at some point when my prior knowledge is more robust.
3.5/5
Some of the big ones:
-nations with large trade surpluses (Germany, China, Japan) cause imbalance to the world BOT by underconsuming domestically which effectively exports their savings abroad. Continued global imbalances contribute to trade tensions = indeed more trade tensions, especially between US and China, have occured though Pettis' call that China would be the last to emerge from the GFC was not correct; neither was the slower China growth, at least not until COVID.
-Germany's continued trade surplus and domestic underconsumption will eventually cause peripheral Europe (PIIGS) to leave the Euro as lack of domestic control over their own currency prevents them from correcting their on economies - all the PIIGS are still in the Euro (Germany and ECB buying their sov bonds).
-Japan effectively moved the private overindebtedness from the 1980s bubble and transferred it to the public sector (debt over 200% of GDP in 2013). Japan needs to reduce debt and increase domestic consumption. = Japan's pubic debt/GDP has risen to over 250% in 2020 and domestic consumption hasn't increased substantially.
-China needs to stop pursuing a trade surplus at all costs and instead of exporting excess savings abroad, it needs to transfer wealth from the state sector to the private sector. = While Xi's Common Prosperity aims to increase household consumption, it isn't being done by reducing state wealth. Excess Chinese savings continue to be exported via BRI/AIIB.
-US is a in a special case because although we have a trade deficit, it's largely a factor of the USD as the primary world reserve currency, as status which effectively is an 'exorbitant burden" rather than the usual "exorbitant privilege." To allow the US to rebalance its BOT, a non-sovereign world reserve currency (SPDR) directed by a supersoverign entity (IMF) needs to be established = not yet.
I think I'll have to revisit this text at some point when my prior knowledge is more robust.
3.5/5
April 9, 2024
An Exemplary Book on International Trade by a fine Economist and Writer
Mr. Michael Pettis does an extraordinary job in crafting the rather simple economic concept of the balance of payments into explaining the complex economic relations of various countries. He first gives a clear explanation of the balance of payments with current accounts and capital accounts. He argues that the net effect of one will inversely cause the net effect of the other. Thus, when one sees current accounts increase, one must see capital accounts corresondingly decrease-- and vice versa. That makes up the first few chapters of the book.
He next talks a great deal about the United States, Europe and China, giving detailed explanations about how current accounts and capital accounts affect a country's economic performance. He gives a very fascinating discussion on Germany and Spain in his chapter on Europe worth reading over a few times. Later in the book, he vouches for the SDR currency to correct the distortionary imbalances created from a single currency absorbing excess savings from surplus countries and hampering its economic growth potential in the process, but he ultimately sees the implausibility of this currency reform from happening. He opines that the dollar's supremacy will remain because of US obstinance in letting it go, lack of liquidity offered the SDR and other alternative currencies compared to the US dollar, and the reluctance of surplus countries in relaxing its hold of US dollar reserves to grow its economies. I believe that was the best chapter of the book.
Ultimately, Mr. Pettis argues that a strong understanding of the balance of payments, with its iron-clad, law-like relationship between current accounts and capital accounts, is the way in which economic observers can predict the moves countries can make to avoid economic crises and grow its economies, and ultimately how the global economy functions. I recommend this book to anyone who desires to learn about macro-economics from an international trade perspective.
Mr. Michael Pettis does an extraordinary job in crafting the rather simple economic concept of the balance of payments into explaining the complex economic relations of various countries. He first gives a clear explanation of the balance of payments with current accounts and capital accounts. He argues that the net effect of one will inversely cause the net effect of the other. Thus, when one sees current accounts increase, one must see capital accounts corresondingly decrease-- and vice versa. That makes up the first few chapters of the book.
He next talks a great deal about the United States, Europe and China, giving detailed explanations about how current accounts and capital accounts affect a country's economic performance. He gives a very fascinating discussion on Germany and Spain in his chapter on Europe worth reading over a few times. Later in the book, he vouches for the SDR currency to correct the distortionary imbalances created from a single currency absorbing excess savings from surplus countries and hampering its economic growth potential in the process, but he ultimately sees the implausibility of this currency reform from happening. He opines that the dollar's supremacy will remain because of US obstinance in letting it go, lack of liquidity offered the SDR and other alternative currencies compared to the US dollar, and the reluctance of surplus countries in relaxing its hold of US dollar reserves to grow its economies. I believe that was the best chapter of the book.
Ultimately, Mr. Pettis argues that a strong understanding of the balance of payments, with its iron-clad, law-like relationship between current accounts and capital accounts, is the way in which economic observers can predict the moves countries can make to avoid economic crises and grow its economies, and ultimately how the global economy functions. I recommend this book to anyone who desires to learn about macro-economics from an international trade perspective.
September 18, 2019
A very interesting book that uses some very simple arithmetic to demonstrate how trade imbalances occur, how to rebalance, and the consequences of not doing so. I am reading it for the second time. This time I am taking notes. Pettis lives and teaches in China. I would say that his thesis is compelling even if it is not mainstream. I think he understands trade, conflict, and the perilous road ahead. There is no scare mongering just a set of "constructs" that help one understand trade imbalances and their consequences. Pettis does not believe that China set out to de-industrialize its competitors. He shows how the great Chinese trade surplus was the consequence of an investment lead growth model that generated high domestic employment while suppressing domestic consumption. GDP is made up of consumption and investment. China can "grow" its economy by simply investing in domestic ventures. This strategy is not sustainable because much of that investment is in things that nobody wants so has no real value. China must write down a tremendous amount of bad debt which will cut apparent growth substantially. China's debt/gdp is now about 300%. This is unsustainable.
November 13, 2021
This is a book in which the author uses a series of accounting identities to show some interesting misconceptions about the interplay of different economic forces and how some conventional wisdom is wrong and how many truths that seem counterintuitive are in fact tautologies. Like many people who do this kind of thing, he's very against moralizing and attributes everything to policy which makes some sense though in Democratic countries policies are often driven by the national preferences of the voters, so to some extent there is some cultural difference that influences the different elements he discusses. I think the thing that is difficult is that he does not really talk about how the relative forces contribute to these issues. It's all well and good to say that the current account and the capital account are accounting inversions and that policies that affect one affect the other, but how is it that the policy of one country can overpower the countervailing policy in another. THis is not well discussed, and this is the weakness of books that rely on using accounting identities to make seemingly counterintuitive but ultimately tautological points.
August 6, 2018
Useful if you want to geek out on what can go wrong as the USA and its trading partners try to resolve various global current and capital account imbalances. Also the author explains some of the poorly understood definitional aspects of international trade, what a trade deficit or surplus really means, what it implies for a country and its trading partners, etc. The author is (so far?) really wrong in his predictions about Europe and the breakup of the Euro, but it's useful to hear the bear case for countries like Portugal, Spain, Greece, even Germany. Not particularly well-written.
May 11, 2017
A really interesting look at the global balance of payments and implications for various global economies. Very well reasoned, makes me wonder what I am missing or if the prescriptions are just too hard politically to implement.
May 23, 2022
You read this and you wonder how so many economists and financial journalist still have a job. Pettis lays out how balance of payments work and illustrates why most financial commentary on global trade is incoherent.
April 8, 2023
The content is very good, and Prof. Pettis is a level-headed rational voice on China. I deduct one star for the length of the book - I think the book could have been 70% shorter, since the core message keeps getting repeated across chapters
August 26, 2023
This book is very logical and well laid out, with a clear and well stated line of argumentation. But I have no idea how to evaluate whether or not it is correct, much less sort out what might be done given it’s prognosis.
July 31, 2017
not too dense or actionable (at least for someone who doesn't buy individual stocks)
October 9, 2019
以国际收支平衡的机制来理解贸易的失衡，一国影响其储蓄及投资的政策（无论直接或间接）均会影响其贸易账户；资本净流入的好处仅在有限条件下体现出来，除此之外，资本净流入会造成一国资产价格的推高。
August 29, 2021
very detailed.
January 3, 2023
9.5/10
March 18, 2017
Great look at how "common wissdom" is so misguided on issues of trade and balances.
January 13, 2019
Very informative book on the global economy and international trade.
You get to understand how the combination of current account deficit and surplus countries have resulted in huge capital flows across the globe and contributed to the financial crisis of 2008 (it was not just a crisis of the financial industry but had more fundamental underlying causes to it).
The author also tells you how the trade imbalances were created in the first place. Savings surpluses, credit fuelled demand, wages repression, currency depreciation, subsidizing corporates at the cost of households, weak domestic demand; a multitude of factors caused the global imbalances.
You get to understand how the combination of current account deficit and surplus countries have resulted in huge capital flows across the globe and contributed to the financial crisis of 2008 (it was not just a crisis of the financial industry but had more fundamental underlying causes to it).
The author also tells you how the trade imbalances were created in the first place. Savings surpluses, credit fuelled demand, wages repression, currency depreciation, subsidizing corporates at the cost of households, weak domestic demand; a multitude of factors caused the global imbalances.
March 19, 2020
The Great Rebalancing is quite old (2013) but is I’d say more than relevant today.
The premise of the book is quite simple; that China’s (but arguably all of Asia) financial “tricks” to spur massive, rapid growth (such as financial repression, currency devaluation, repressive wages ect) jump-started economic growth but also in the long run created instability and misallocation of resources in both the US and China’s economy; exacerbating the trade tensions we see today.
It is true that the world (excluding China) has known a massive de-industrialization due to China’s over-capacities and over-investment, and China insofar has been unable to switch to a consumer-driven economy due to an unhealthy addiction to investment.
In his opinion, it can only end in a great rebalancing; another “Great Financial Crisis” of the like of the 2008 crash, or something similar.
The only critique I’d find over the book is that the author believes that the US did not benefit from the massive inflows of capital, calling the “exorbitant privilege” an “exorbitant burden”. I wholly disagree: while it is true that massive inflows of “dumb” capital into the economy did penalize some sectors such as manufacturing and other export-oriented industries, the American middle-class greatly benefited from it as they could consume as if there was no tomorrow. Finance and Technology are massive sectors in the US, and it wouldn’t have been made possible without these capital inflows.
I’d go as far to say that this wave of populist rage we are currently seeing in the US is in reality a conflict between those who benefit from the current system and those who where “sacrificed” to it.
The premise of the book is quite simple; that China’s (but arguably all of Asia) financial “tricks” to spur massive, rapid growth (such as financial repression, currency devaluation, repressive wages ect) jump-started economic growth but also in the long run created instability and misallocation of resources in both the US and China’s economy; exacerbating the trade tensions we see today.
It is true that the world (excluding China) has known a massive de-industrialization due to China’s over-capacities and over-investment, and China insofar has been unable to switch to a consumer-driven economy due to an unhealthy addiction to investment.
In his opinion, it can only end in a great rebalancing; another “Great Financial Crisis” of the like of the 2008 crash, or something similar.
The only critique I’d find over the book is that the author believes that the US did not benefit from the massive inflows of capital, calling the “exorbitant privilege” an “exorbitant burden”. I wholly disagree: while it is true that massive inflows of “dumb” capital into the economy did penalize some sectors such as manufacturing and other export-oriented industries, the American middle-class greatly benefited from it as they could consume as if there was no tomorrow. Finance and Technology are massive sectors in the US, and it wouldn’t have been made possible without these capital inflows.
I’d go as far to say that this wave of populist rage we are currently seeing in the US is in reality a conflict between those who benefit from the current system and those who where “sacrificed” to it.
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