The parable of the blind men and the elephant

Abstract

This essay analyzes competing explanations for the pattern of global imbalances and the magnitude of the North American external deficit. It is argued here that, far from being incompatible, the proposed explanations are part of a larger story. The fall of the US savings rate has played an important role in the advent of US and global imbalances. At the same time, favorable productivity trends made the US a good place to invest, attracting foreign savings that help finance North American investment and its current account. Excess global savings is a factor that also counts, as it supports capital flows to the US and investment in the US. Finally, the view of Sino-American codependency highlights the level of satisfaction of the Asian countries with a situation in which export demand is disproportionately important relative to domestic demand (due to a combination of high risk aversion after the 1997-98 crisis and their continued commitment to export-led growth), a position that is sustained by undervalued exchange rates and is reflected in the accelerated growth of US imports.

JEL classification: F42 ; F44 ; G01