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Michael Pettis on China

In an essay dealing with coverage of international economics entitled Michael Pettis: China's Economy, Internal And External Balance, Pettis compares his own approach In The Great Rebalancing to that of another author, Peter Timis' The Leaderless Economy:

Both books analyze the global economy in pretty much the same way, as an economic system in which any country's domestic economy is inextricably linked to other economies through the balance of payments mechanisms. The ability to place events within their global context is consequently crucially important in understanding any country's economic performance, but actually doing so tends more to be the exception than the rule.
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The Leaderless Economy makes the same point I try to make in The Great Rebalancing: the economic analysis of any country is largely useless if it ignores, or treats as a minor issue, links with the external sector - i.e. other countries - and this is even more true today than in the past. Even something as important, and as seemingly "domestic", as the US savings rate (which for most people is assumed largely to reflect cultural preferences towards thrift among American households) is not determined primarily by American households but rather by its links with savings distortions abroad.
This might seem a profoundly counterintuitive statement, but in fact you only need to understand two or three accounting identities to be able to work logically through the explanation. I showed why one country's savings rate is as likely to be determined by domestic distortions as it is by distortions abroad in a blog entry on whether a savings glut must cause global savings to rise. In another blog entry, I explained why a low savings rate in countries like Spain was a necessary outcome of policies in Germany that effectively restricted wage growth. And finally I showed how - because of the role of the dollar in reserve accumulation and, more generally, the unrestricted ability of foreigners to buy US assets - the US savings rate is determined largely as a residual needed to balance net capital flows, in a blog entry on the so-called exorbitant privilege...

I could not agree more. Between the two quoted sections is a very cogent example of just how important this relationship is. The effects of international trade on one country's economy could be seen as the combination of the three sector accounting identity for each country linked to the other countries through the import/export terms. (Another example is all of the history I read before becoming modestly economically literate.)  :-)

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Aug 29th, 2015 at 11:15:19 AM EST
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