The need for the great rebalancing

For nations living the good life, the party's over, IMF says

By Howard Schneider

Washington Post Staff Writer
Saturday, April 24, 2010"Rebalancing" is an idea that most everyone endorses -- including the technicians at the fund and President Obama and the leaders of the G-20 group of economically powerful nations. In broad strokes, it means curbing what has been a massive transfer of capital from nations that consume more than they produce, such as the United States, to nations that produce more than they consume, such as China.
The imbalance has been key to China's modernization: The country buys U.S. government bonds by the tens of billions to keep the dollar stronger than it would be and to keep its domestic currency -- and its exports -- cheaper. Looked at one way, the flow of U.S. debt to the People's Bank of China has acted like a giant, collective credit card, underwriting consumers across the United States and driving the business models of major retailers such as Wal-Mart." --
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Comment: Easier said than done. What mainstream economists neglect is the fact that rebalancing implies a fundamental change in the capital structures of the countries involved. Rebalancing is not simply done by a "depreciation" of the currency of the debtor country and the respective "appreciation" of the currency of the export surplus country. In the case of the US and China what lies ahead is much more dramatic. A fundamental shift of the capital structure of the United States from imports and service economy to manufacturing and exports and in China it is the other way around. Which is easier, which is harder? You guessed it right.