The Benign View of Global Imbalances
RBA Governor Macfarlane has long taken a benign view of global ‘imbalances.’ Fortunately, it would seem that this perspective is shared by his Deputy, Glenn Stevens, widely tipped to take over from Macfarlane when his current term expires in September:
it is common for observers to warn against the risk that the ‘imbalances’ may unwind in a disruptive fashion. Often this is not spelled out. What is sometimes meant, I think, is that those currently accumulating dollar-denominated claims suddenly change their minds, precipitating abrupt movements in exchange rates and interest rates. Such developments might, in this view, lead to a pronounced weakening of domestic demand in countries like the US if long-term interest rates rose abruptly, while a big decline in the dollar might affect the ability of areas like Europe to export.
One can never rule out the possibility that financial markets will suffer a sudden and dramatic loss of confidence. But it is not as though markets are unaware of the various ‘imbalances’ or the associated risks – they read about them on a daily basis. Yet the actual pricing for risk in markets apparently suggests an assessment that risks in general are of relatively little concern at present.
In the event that there is some market discontinuity, I suspect that it is more likely to be sparked by some sort of credit event that prompts a change in appetite for risk in general, than by reactions to current account positions per se. It is not obvious that US interest rates would rise, or the dollar fall, in the face of such an event.
posted on 22 February 2006 by skirchner in Economics
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