[BAD] ECONOMIC POLICIES CAN CARRY NEGATIVE GLOBAL REPERCUSSIONS

Michael Pettis, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy (Princeton & Oxford: Princeton U. Press, 2013) (From the bookjacket: "China's economic growth is sputtering, the Euro is under threat, and the United States is combating serious trade disadvantages. Another Great Depression? Not quite. Noted economist and China expert Michael Pettis argues instead that we are undergoing a critical rebalancing of the world economies. Debunking popular misconceptions, Pettis shows that severe trade imbalances spurred on the recent financial crisis and were the result of unfortunate policies that distorted the savings and consumption patterns of certain nations. Pettis examines the reasons behind these destabilizing policies, and he predicts severe economic dislocation--a lost decade for China, the breaking of the Euro, and a receding of the U.S. dollar--that will have long-lasting effects." "Pettis explains how China has maintained massive--but unsustainable--investment growth by artificially lowering the cost of capital. He discuses how Germany is endangering the Euro by favoring its own development at the expense of its neighbors. And he looks at how the U.S. dollar's role as the world's reserve currency burdens America's economy. Although various imbalances may seen unrelated, Pettis shows that all of them--including the U.S. consumption binge, surging debt in Europe, China's investment orgy, Japan's long stagnation, and the commodity boom in Latin America--are closely tied together, and that it will be impossible to resolve any issue without forcing resolution for all." "Demonstrating how economic policies can carry negative repercussions the world over, The Great Rebalancing sheds urgent light on our globally linked economic future." From the text: "Mature, rich, diversified countries ... have never needed foreign funding." "But when these countries did receive large capital inflows that were not associated with burgeoning productive investment at home--the obvious examples being the United States and peripheral Europe in the past decade--the nearly automatic result was that the recipient country was forced to choose between rising unemployment or an unsustainable increase in debt. Without some automatic adjustment mechanism preventing the strategic accumulation of dollar reserves or local assets by other countries, large imbalances could persist in ways that would have been impossible earlier." 'The breakdown of Bretton Woods eliminated one of the classic adjustment mechanisms--the need to back money creation with gold--that prevented countries from accumulating unlimited amounts of foreign reserves, and it was only afterward that it became possible for countries that normally should have been net capital importers to reverse positions with countries that normally should have been net capital exporters." "This is certainly not to say that we were better off under the gold standard, but it does suggest that some of the automatic adjustment mechanisms under the gold standard were extremely useful and should somehow be replicated." Id. 169.).