Great Rebalancing

Michael Pettis is professor of finance and economics at Peking University, a senior associate at the Carnegie Endowment, and a widely read commentator on China, Europe, and the global economy. He is the author of The Volatility Machine: Emerging Economies and the Threat of Financial Collapse.

• Preface to the Paperback Edition xi CHAPTER ONE Trade Imbalances and the Global Financial Crisis 1 * Underconsumption 4 * The Different Explanations of Trade Imbalance 6 * Destabilizing Imbalances 9 * We Have the Tools 11 * Why the Confusion? 14 * Some Accounting Identities 17 * The Inanity of Moralizing 19 * The New Economic Writing 22 CHAPTER TWO How Does Trade Intervention Work? 26 * Trade Intervention Affects the Savings Rate 29 * Currency Manipulation 32 * Exporting Capital Means Importing Demand 34 * What Happens If China Revalues the Renminbi? 37 * Wealth Is Transferred within China 40 * Does China Need a Social Safety Net? 42 CHAPTER THREE The Many Forms of Trade Intervention 47 * How Changes in Wealth Affect Savings 50 * Wage Growth 52 * Trade Policy as the Implicit Consequence of Transfers 55 * Financial Repression 58 * Higher Interest Rates and Household Wealth 61 * Do Higher Interest Rates Stimulate or Reduce Consumption? 64 * Currency versus Interest Rates 66 CHAPTER FOUR The Case of Unbalanced Growth in China 69 * What Kind of Imbalance? 74 * Growth Miracles Are Not New 78 * The Brazilian Miracle 81 * Powering Growth 84 * Paying for Subsidies 87 * Limits to Backwardness 89 * The Trade Impact 92 * A Lost Decade? 94 * Can China Manage the Transition More Efficiently? 96 * Some More Misconceptions 97 CHAPTER FIVE The Other Side of the Imbalances 100 * Can Europe Change American Savings Rates? 103 * How Does Trade Rebalance? 106 * Globalization Is Not Bilateral 109 * The Global Shopping Spree 113 * Trade Remains Unbalanced 115 CHAPTER SIX The Case of Europe 119 * The Mechanics of Crisis 122 * Too Late 125 * German Thrift 128 * Forcing Germany to Adjust 131 * Two-Sided Adjustment 133 CHAPTER SEVEN Foreign Capital, Go Home! 136 * Swapping Assets 139 * It's about Trade, Not Capital 142 * Trade Imbalances Lead to Debt Imbalances 144 * The Current Account Dilemma 147 CHAPTER EIGHT The Exorbitant Burden 150 * Why Buy Dollars? 153 * It Is Better to Give Than to Receive 157 * Foreigners Fund Current Account Deficits, Not Fiscal Deficits 161 * Rebalancing the Scales 163 * When Are Net Capital Inflows a Good Thing? 166 * Can We Live without the Dollar? 168 * Why Not Use SDRs? 172 * An American Push Away from Exorbitant Privilege 174 CHAPTER NINE When Will the Global Crisis End? 178 * Transferring the Center of the Crisis 180 * Reversing the Rebalancing 183 * Some Predictions 185 * The Global Impact 191 APPENDIX Does income equality lead to unemployment? 197 Notes 217 Index 225

"[Michael Pettis is] a brilliant economic thinker."--Edward Chancellor, Wall Street Journal "Insightful... [O]ffers a sweeping perspective that links trade, exchange rates, and cross-border capital flows to underlying domestic taxation, investment, and fiscal policies... Pettis's erudite, but lucid and very readable analysis brims with surprising ripostes to conventional wisdom... Pettis's stimulating, contrarian take on the present crisis challenges dogma with clear thinking."--Publishers Weekly "This is a book that should be read by: (a) politicians, central bankers and anybody else involved in macroeconomic policy; (b) all economists; (c) all students of economics; and (d) everybody else. The Great Rebalancing: Trade, Conflict and the Perilous Road Ahead for the World Economy by Michael Pettis is as sharp and clear as a cut diamond in its analysis of the continuing global imbalances. The author brings logic, accounting identities and clarity of thought and language to bear on the issue of prospects for the global economy, putting most other commentators into the shade."--Diane Coyle, Enlightened Economist "[A] book full of easy-to-understand, yet often misunderstood theories, explanations and predictions for what went wrong internationally before the 2008 Financial Crisis, what has been going on since, and where things are likely to head in the future... The Great Rebalancing is probably one of the clearest, most elegant and logically written explanations of world trade, including both how policies affect trade and how trade affects economies... [T]his is not just a China book, but a book encompassing some of the biggest economic and financial questions of our time. The persuasive, clear and well-reasoned arguments behind many of the seemingly unorthodox ideas in the book will make it both pleasing and nicely unsettling for many readers. Hopefully its message will be heard amongst policymakers before some of the more disturbing predictions become realities."--James Parker, Diplomat "With much pleasure, I highly recommend Michael Pettis' newest book The Great Rebalancing... Michael Pettis has taught me most of what I know about global trade. I also happen to believe he is the world's foremost expert on China in relation to trade and global macro events. I give two thumbs up to The Great Rebalancing."--Mike "Mish" Shedlock, Global Economic Analysis "I've been waiting for this book for over 10 years... Anyone who wants to understand international economics better will benefit from this book. I cannot recommend it more highly."--David Merkel, Seeking Alpha "This is a dense and well-argued book... It will be read with interest by the large and growing community that follows China's economy."--Mark O'Neill, South China Morning Post "The Great Rebalancing is probably one of the clearest, most elegant and logically written explanations of world trade, including both how policies affect trade and how trade affects economies... [T]his is not just a China book, but a book encompassing some of the biggest economic and financial questions of our time. The persuasive, clear and well-reasoned arguments behind many of the seemingly unorthodox ideas in the book will make it both pleasing and nicely unsettling for many readers. Hopefully its message will be heard amongst policymakers before some of the more disturbing predictions become realities."--James Parker, Diplomat Pacific Money Blog "[F]ascinating reading."--BizEd "[The Great Rebalancing] is original and quite convincing, and coherently challenges conventional accounts."--Choice "Demonstrating how economic policies can carry negative repercussions the world over, The Great Rebalancing sheds urgent light on our globally linked economic future."--World Book Industry "Policymakers should heed the macroeconomic laws that Pettis articulates. His text is a sound introduction to global balance-of-payment mechanisms, using the financial crisis as the ideal case study."--Survival "Pettis does a major service in explaining the determinants of global imbalances, providing insights into the functioning of the Chinese economy, while bringing in quotes from historical figures, prominent economists, and misguided pundits... I hope this book stimulates a more informed debate on how to rebalance growth, trade, and capital flows in the least disruptive manner."--Caroline Freund, Journal of World Trade Review "Pettis does a major service in explaining the determinants of global imbalances, providing insights into the functioning of the Chinese economy, while bringing in quotes from historical figures, prominent economists, and misguided pundits. This serves the purpose of underscoring how confused thinking can be on this important topic--a topic that ultimately helps determine the distribution of growth and jobs around the globe. I hope this book stimulates a more informed debate on how to rebalance growth, trade, and capital flows in the least disruptive manner."--Caroline Freund, Journal of World Trade "The Great Rebalancing offers a stimulating read. The author advances many arguments I find quite interesting and pushes me to rethink issues I tend to take for granted. It certainly provides a different perspective."--Paul Deng, Copenhagen Journal of Asian Studies "The Great Rebalancing does what all good books should do: it prompts the reader to question old assumptions and think about the world in a slightly different way. That is not only intellectually stimulating; it is, or should be, also of practical value. Maybe one day they will even get around to reading, and learning from, this book in Berlin."--Guy de Jonquieres, Economic Record