The most interesting shift here is that imbalances are no longer just economic distortions — they are becoming instruments of statecraft.
If surpluses function as war chests, industrial-policy tools, and buffers against sanctions, then voluntary rebalancing is much harder to imagine. What looks inefficient from a welfare perspective can still look rational from a geopolitical perspective.
The core loop seems to be: surpluses buy buffers, buffers enable risk-taking, risk-taking triggers sanctions, sanctions prove you needed bigger buffers.
Absolutely agree. This conversation was solidly about macro fundamentals during the last wave of imbalances. Now it's about macro AND safeguarding your economy for geopolitical shocks.
Hi Fabian! I think Pettis makes important points on how countries increase their own export competitiveness and suppress demand. Where I disagree is that these actions force deficits on other countries. I am aligned more with the orthodox view that deficits and surpluses are more a function of domestic policy choices (US fiscal policy, lack of EU investment, and China's failure to stimulate demand). Pettis also assesses that the dollar's status is a major transmission channel for our deficits. Even Obstfeld (who is strongly in the orthodox camp) states that "strong international demand for dollars may make the dollar stronger against foreign currencies than it would be otherwise, leading to a weaker US current account position" — but he stresses that impact is small. It may help enable the US government to spend at lower rates than it otherwise could without reserve status, and it may help support US consumer culture, but it does not force them. The distinction between enable and force is an important one in this debate.
The most interesting shift here is that imbalances are no longer just economic distortions — they are becoming instruments of statecraft.
If surpluses function as war chests, industrial-policy tools, and buffers against sanctions, then voluntary rebalancing is much harder to imagine. What looks inefficient from a welfare perspective can still look rational from a geopolitical perspective.
The core loop seems to be: surpluses buy buffers, buffers enable risk-taking, risk-taking triggers sanctions, sanctions prove you needed bigger buffers.
Absolutely agree. This conversation was solidly about macro fundamentals during the last wave of imbalances. Now it's about macro AND safeguarding your economy for geopolitical shocks.
Same with domestic imbalances - the national debt.
Gold made rebalancing automatic.
Fiat makes rebalancing political.
The orthodox error is to use commodity-standard economic theory in a fiat world.
The heterodox error is to treat fiat discretion as liberation, while underpricing the politics that discretion creates.
We have to wait on politicians to correct imbalances and they won’t until they have to or until it’s too late.
What do you think of Michael Pettis' perspective on imbalances? Especially https://www.currencyofpower.co/p/whether-you-like-it-or-not-your-economy?has_completed_unsubscribed_unlock=true
Hi Fabian! I think Pettis makes important points on how countries increase their own export competitiveness and suppress demand. Where I disagree is that these actions force deficits on other countries. I am aligned more with the orthodox view that deficits and surpluses are more a function of domestic policy choices (US fiscal policy, lack of EU investment, and China's failure to stimulate demand). Pettis also assesses that the dollar's status is a major transmission channel for our deficits. Even Obstfeld (who is strongly in the orthodox camp) states that "strong international demand for dollars may make the dollar stronger against foreign currencies than it would be otherwise, leading to a weaker US current account position" — but he stresses that impact is small. It may help enable the US government to spend at lower rates than it otherwise could without reserve status, and it may help support US consumer culture, but it does not force them. The distinction between enable and force is an important one in this debate.