Could it be a model for brick­sand-mor­tar re­tail­ers?

The Washington Post Sunday - - FRONT PAGE - Steven Pearl­stein

We in­ter­rupt our wall-to-wall cov­er­age of the lat­est Trump im­broglio to bring you this im­por­tant news flash:

Re­mem­ber the global econ­omy, the one that nearly col­lapsed in 2009? Well, it turns out that although we sta­bi­lized it, we never ac­tu­ally fixed it, and there is a very real dan­ger that it is about to un­wind all over again.

That’s the sober­ing mes­sage de­liv­ered by the former gov­er­nor of the Bank of Eng­land to a blue-chip gath­er­ing Tues­day evening at the Peter­son In­sti­tute in Wash­ing­ton. Mervyn King — Lord King to his friends and coun­try­men — is the clos­est thing there is to a char­ter mem­ber of the global eco­nomic and fi­nan­cial elite, a Cam­bridge-trained economist who taught at Har­vard, MIT and the Lon­don School of Eco­nomics be­fore set­tling into a 26year ca­reer at the world’s sec­ond-old­est cen­tral bank. As King sees it, as long as coun­tries such as the United States and Bri­tain con­tinue to run large and per­sis­tent trade deficits while coun­tries such as China and Ger­many con­tinue to run large and per­sis­tent trade sur­pluses, the global econ­omy and the global fi­nan­cial sys­tem will re­main fun­da­men­tally un­sta­ble and sus­cep­ti­ble to an­other cri­sis.

One can hear faint echoes of a Don­ald Trump stump speech in King’s con­cerns about trade deficits. But although Pres­i­dent Trump and his team think the so­lu­tion is to ne­go­ti­ate bet­ter trade deals and bring man­u­fac­tur­ing jobs back to the United States, King un­der­stands it’s more com­pli­cated than that.

As long as the United States and other

An­glo-Saxon coun­tries con­tinue to con­sume more than they pro­duce, sav­ing too lit­tle, and as long as their trad­ing part­ners in Europe and Asia con­tinue to pro­duce more than they con­sume, sav­ing too much, the de­vel­oped world will con­tinue to live with some com­bi­na­tion of high un­em­ploy­ment and stag­nant in­comes. Things won’t get bet­ter — things can’t get bet­ter — un­til the dol­lar and the pound fall, in­ter­est rates rise and the global econ­omy is al­lowed to find a more bal­anced and sus­tain­able equilib­rium.

In­deed, King warned, the only thing that is stand­ing in the way of a painful day of reck­on­ing is the will­ing­ness of the world’s ma­jor cen­tral banks to con­tinue print­ing vast sums of money — money that has been lent to in­vestors who use it to bid up the prices of stocks, bonds and real es­tate well be­yond their eco­nomic value, and money that has been lent to con­sumers and gov­ern­ments who use it to live be­yond their means.

In a world of free trade and float­ing ex­change rates, large trade im­bal­ances should nat­u­rally cor­rect them­selves and dis­ap­pear as the cur­ren­cies of deficit coun­tries fall while those of sur­plus coun­tries rise. But re­al­ity has turned out dif­fer­ently from eco­nomic the­ory. For decades, Asian coun­tries have ma­nip­u­lated their cur­ren­cies in var­i­ous ways to pre­vent that nat­u­ral re­bal­anc­ing, while more re­cently, the cre­ation of the euro has ef­fec­tively done the same for Ger­many and the other coun­tries in Europe.

In 2007, for ex­am­ple, the Chi­nese trade sur­plus was a whop­ping 10 per­cent of gross do­mes­tic prod­uct, which re­flected not only a fixed ex­change rate with the dol­lar but also a gross sav­ings rate of 46 per­cent of GDP. Since then, the trade sur­plus has fallen to just un­der 2 per­cent as the Chi­nese gov­ern­ment has al­lowed its cur­rency to rise.

Mean­while, the Ger­man trade sur­plus has risen to more than 8 per­cent of GDP, while the sav­ings rate is around 28 per­cent. (The U.S. sav­ings rate, by con­trast, is be­low 20 per­cent.)

Be­cause of these im­bal­ances, the cu­mu­la­tive trade sur­pluses of China and Ger­many came to about $2 tril­lion over the past five years. Not co­in­ci­den­tally, that was ap­prox­i­mately the mir­ror im­age of the U.S. trade deficit over the same pe­riod.

It is no won­der, then, that over just a sin­gle gen­er­a­tion, the United States has gone from be­ing the world’s largest cred­i­tor to the world largest debtor. Along the way, the global econ­omy has set­tled into an un­sat­is­fy­ing and ul­ti­mately un­sus­tain­able equilib­rium char­ac­ter­ized by slow growth, low in­ter­est rates, ris­ing debt lev­els and in­flated prices for stocks, real es­tate and other fi­nan­cial as­sets.

If you are like me, just think­ing about the con­stant in­ter­play among trade flows, in­vest­ment flows, sav­ings rates, ex­change rates, in­fla­tion, in­ter­est rates and as­set prices makes your head hurt. Per­haps be­cause it’s never clear what is cause and what is ef­fect, or whether the ef­fect is up or down. But you don’t have to have a PhD in eco­nomics to un­der­stand that no coun­try, how­ever rich, can bor­row in­def­i­nitely.

“The longer this state of af­fairs per­sists, the greater the ul­ti­mate correction will be,” King told his audience Tues­day. At some point, in­ter­est rates will rise, stock and real es­tate prices will fall, and overly ex­tended house­holds, com­pa­nies and coun­tries will be un­able to ser­vice their debts.

The debt cri­sis in Greece and the bank­ing cri­sis in Italy are ca­naries-in-the-coal-mine warn­ings of a big­ger cri­sis to come, King said, if gov­ern­ments don’t take strong steps to bring ex­change rates into bet­ter align­ment: “Mud­dling through” — hav­ing cen­tral banks con­tinue to buy up ev­ery bond they can lay their hands on while send­ing the In­ter­na­tional Mone­tary Fund on an end­less res­cue mis­sion — is no longer an op­tion.

Which brings us back, in a strange way, to Trump.

For 26 years, King — as the Bank of Eng­land’s chief economist, a mem­ber of its pol­icy com­mit­tee and then gov­er­nor — has had a front-row seat at ev­ery in­ter­na­tional eco­nomic con­fer­ence and fi­nan­cial cri­sis. And de­spite talk of a new world or­der in which Amer­i­can wealth and power is matched by that of Europe and the Asian tigers, his view is that U.S. lead­er­ship is still re­quired to do any­thing hard or im­por­tant, just as it was in 1944 at the Bret­ton Woods Con­fer­ence that set the now-out­dated rules for the global fi­nan­cial sys­tem.

As King sees it, Trump was right to re­mind us that trade deficits mat­ter, even if he badly mis­un­der­stands what drives them or the best way to fix them. Now is the time for Trump to put his deal­mak­ing in­stincts to good use by con­ven­ing a con­fer­ence among the two big­gest deficit coun­tries — the United States and Bri­tain — and those with the big­gest sur­pluses — Euro­pean coun­tries and China — aimed at re­bal­anc­ing trade and in­vest­ment flows and cre­at­ing a new fi­nan­cial ar­chi­tec­ture to keep them in bal­ance.

King was vague on what that ar­chi­tec­ture might look like, other than to sug­gest it might in­volve some fi­nan­cial penalty for coun­tries that run sur­pluses, a de­fault mech­a­nism for overly in­debted coun­tries and co­or­di­nated in­ter­ven­tions in cur­rency ex­change mar­kets.

A lit­tle Trump-like bul­ly­ing might be re­quired to get the par­ties to the ta­ble, while the de­tailed ne­go­ti­a­tions would have to be left to some­one else. My nom­i­nee would be Com­merce Sec­re­tary Wil­bur Ross, a savvy prac­ti­tioner of the art of bank­ruptcy work­outs who knows how to keep his op­tions open and his mouth shut.

As to who would play the cru­cial role of John May­nard Keynes, the crafty and cre­ative Bri­tish economist who pro­vided the in­tel­lec­tual foun­da­tion for the first Bret­ton Woods Con­fer­ence, there could be no one bet­ter than Mervyn King.

As King sees it, Trump was right to re­mind us trade deficits mat­ter.

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