Global Imbalances, Subprime Crisis, and Financial Development in East Asia
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The world economy currently suffers from two major financial troubles. The first trouble is global imbalances over the last two decades. The second trouble is the on-going credit crunch caused by subprime crisis in the United States. Several factors that caused global imbalances and subprime crisis are investigated and we find that global imbalances are not likely to be resolved soon because most of factors causing global imbalances reflect structural aspects of the world economy. We also find that global imbalances and subprime crisis share the same cause, which could be easily understood under the framework of global asset shortage. The Fed’s monetary policy stance should be tightened when the current liquidity crisis is over. If not, the asset market will again generate excessively high asset prices, which raise the chances of market crash. The ultimate solution to global imbalances and subprime crisis is the developments in the financial industries of the rest of the world, especially emerging Asia including China. Until then, the U.S. current account deficit will continue to be financed by the rest of the world, mainly by the emerging Asia. The United States will not lose its hegemony on the world politics and economy in the near future because its deficit will continue to be supported by the rest of the world. This is possible mainly because the U.S. economy owns the world’s most competitive financial industry that is capable of producing sound and liquid assets for the savers in the world.
Abstract
The world economy currently suffers from two major financial troubles. The first trouble is global imbalances over the last two decades. The second trouble is the on-going credit crunch caused by subprime crisis in the United States. Several factors that caused global imbalances and subprime crisis are investigated and we find that global imbalances are not likely to be resolved soon because most of factors causing global imbalances reflect structural aspects of the world economy. We also find that global imbalances and subprime crisis share the same cause, which could be easily understood under the framework of global asset shortage. The Fed’s monetary policy stance should be tightened when the current liquidity crisis is over. If not, the asset market will again generate excessively high asset prices, which raise the chances of market crash. The ultimate solution to global imbalances and subprime crisis is the developments in the financial industries of the rest of the world, especially emerging Asia including China. Until then, the U.S. current account deficit will continue to be financed by the rest of the world, mainly by the emerging Asia. The United States will not lose its hegemony on the world politics and economy in the near future because its deficit will continue to be supported by the rest of the world. This is possible mainly because the U.S. economy owns the world’s most competitive financial industry that is capable of producing sound and liquid assets for the savers in the world.
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