Tuesday, October 8, 2013

Michael Pettis: (Re)Cycling Global Economic Crises (China Financial Markets)

Revisiting My 2011 Predictions 

Author: Michael Pettis · September 30th, 2013

Since the beginning of the global crisis in 2007-08 I have argued that the crisis was a consequence primarily of global trade imbalances generated by structural features that led to significant saving imbalances in China, the US, and within Europe. I describe this model in more detail in my recent book, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy (Princeton University Press).

In that sense the current crisis shares a lot of characteristics with nearly every other global crisis of the past 200 years, as I point out in my book, and is likely to be resolved in similar ways: with a series of sovereign defaults or debt restructurings including, but not limited to, a number of European countries. None of the “globalization” cycles of the last 200 years has ended without widespread sovereign defaults except the one that ended in the First World War, and in that case the war caused soaring commodity prices and sharp constraints in Europe’s manufacturing exports, both of which were a tremendous help to developing countries. This probably why this was the only “globalization” cycle that did not end in massive sovereign defaults.

For those who are interested, by the way, I would argue that the first “modern” global debt crisis probably began in Britain in the mid-1820s. It spread to southern Europe and Latin America by 1825 (the first in a long series of Latin American sovereign debt crises), and continued on into the US in the 1830s with the default of a number of US states including, most shockingly, Pennsylvania, which was at the time one of the richest of the US states and among the richest economic entities in the world.


No comments: