Former Bank of England governor Mervyn King is worried about trade imbalances (which arise when a country consistently imports more than it exports, or vice versa). Having fallen in the financial crisis, imbalances have been expanding once more during the recovery. King pins the blame on countries trying to “fix exchange rates at levels that are inconsistent with” balanced trade.
China and the eurozone have been active on this front. The former “has had a large current-account surplus for much of the past 20 years”. Although this has fallen from 9.9% of GDP in 2007 to 1.8% last year, “the sheer magnitudes of China’s export surplus and its high savings have been enough to start the unprecedented fall in real interest rates”. Germany is worse, with a surplus equal to 8.5% of GDP. These distortions have led to the election of a US government that “has set out its stall to reduce the American trade deficit, even to the extent of embracing protectionism”.
Another consequence has been a huge build up of debt in the deficit countries (those who import more than they export), especially the US and UK. Globally, debt is higher, at “some 325% of world GDP”, than before the financial crisis. For now, this debt is just about manageable, because long-term interest rates are at historically low levels (US ten-year Tips – inflation protected bonds – yield just 0.5%, for example).
The trouble is that “when interest rates rise, asset prices will fall back relative to income levels, but debt burdens will remain unaltered”. As a result, King worries that “the next financial crisis may well start with a few uncoordinated defaults that lead to a wave of debt restructurings”.