Current account imbalances are often discussed in terms of good and bad. Scourges of trade surpluses castigate Germany and China, which are the world's Number one and two in the category. The real culprit is elsewhere: the global financial system.
In one vision of the world, trade deficits are wrong because they show a country is living beyond its means. In another, the bad guys are the countries with positive balances, because they deprive trade partners of export opportunities. On the latter view, the biggest villains are creating, respectively, $285 billion and $224 billion of trouble this year, according to International Monetary Fund estimates.
Germany and China have good reasons to reject the charge. Is the government in Berlin supposed to restrain successful export industries? If not, how can it stimulate demand for imports without damaging other parts of the economy? Besides, there is no need to push German domestic demand higher. This is currently growing at a reasonably strong annual rate, 1.6 per cent, according to Barclays. And why should other countries complain about getting so many fine German goods?
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The fact that these countries export more than they import is not reprehensible. However, there is a dangerous side effect. Germany and China earn more money from exports than they pay for imports. The additional cash has to go somewhere. Some of it goes as credit to support exports and some just goes into global financial markets. Both practices risk wreaking havoc.
The loans to purchasers often go bad, but the German government and the nation's banks have resisted taking losses in the euro zone. The losses can cripple banks and the refusal to recognise them can clog up lending. The excess liquidity can raise leverage levels to dangerously high levels.
There are no easy solutions to the financial problems of trade surpluses. But the first step is to identify the real fault.
