Books | Pre-crisis, but an X-ray of financial imbalances

Books | Pre-crisis, but an X-ray of financial imbalances
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First Published: Sun, Nov 23 2008. 11 39 PM IST

The Global Recession Risk: Dollar Devaluation and the World Economy: Carlos M. Peláez and Carlos A. Peláez,  Palgrave Macmillan, 2007, 276 pages,  List Price: $99.95,  ISBN-13: 978-0230521506
The Global Recession Risk: Dollar Devaluation and the World Economy: Carlos M. Peláez and Carlos A. Peláez, Palgrave Macmillan, 2007, 276 pages, List Price: $99.95, ISBN-13: 978-0230521506
Updated: Sun, Nov 23 2008. 11 39 PM IST
This expert analysis—written before the 2008 economic crisis—presents a thorough discussion of ways to avoid a possible world recession. Analysing the possibility of an unpleasant economic future marked by global recession and monetary crisis is difficult when the highest ranking experts on the subject reach opposing conclusions. To understand which side is “more” right about either foul weather or balmy conditions, look at the essentials of domestic and international finance.
The Global Recession Risk: Dollar Devaluation and the World Economy: Carlos M. Peláez and Carlos A. Peláez, Palgrave Macmillan, 2007, 276 pages, List Price: $99.95, ISBN-13: 978-0230521506
Authors Carlos M. Peláez and Carlos A. Peláez cite a staggering number of expert analysts and researchers in this scholarly economic study of possible world recession, including Benjamin Bernanke and Timothy Geithner. Although many of the arguments they cover in the book are extremely technical, most business leaders could benefit from the views presented by the authors and important economic heavyweights.
The book covers the US current account deficit, or CAD, in detail and discusses other market areas and concerns. The current account is an economist’s concept of the interrelationship of four factors: goods and services, plus income, minus unilateral transfers equals the current account. The US CAD has been negative for three decades, indicating increasingly dangerous levels of debt. Experts predict it will continue to grow unless the US government takes strong action to reverse it. One major counter argument against this dire prediction is that CAD figures are “meaningless” unless viewed in context, for instance in comparison with the US’ constantly increasing productivity. In truth, however, the US may not be just another nation with bad debt: About 40% of its borrowing represents self-financing of its public national debt. This economic “trick” means the US is using its own currency against its debt, and thus avoiding so-called “twin deficits”. To some economists, this signifies little need for alarm because the nation is covering its deficits with the strongest reserve in the world—its own dollar. Other economists do not buy that story.
Regarding the US-China trade imbalance, the book reports that the US has not responded to strong consumer goods imports from the China-Asiatic basin with equally strong exports to even out the balance of trade. With a trillion-dollar surplus, China is the world’s leading lender, or exporter. The US, with its deficit, is the largest borrower, or importer. This “clash of the titans”, as one analyst named it, must be reconciled, so that the global balance doesn’t collapse.
Of course, experts disagree. Some have a “positive outlook”, though many econometric simulations suggest a negative future. Many monetary analysts say the growing US CAD will have profound economic consequences. Cutting the CAD from 7% of GDP to 3% would require the US to make a major economic switch to tradable goods, a highly disruptive process that would take several years. The International Monetary Fund, or IMF, calculates that such an adjustment would cut the rate of the US total output, or GDP, to only 0.5% yearly. And if that happens: “The world economy would lose its engine of growth. Recession could spread to all continents”.
The book issues a clear warning, told through statistics and studies, that the international debt structure must be corrected as a “shared responsibility” of all nations to avoid it spreading to all continents. Although events have surpassed some of the Peláezs’ forecasts, getAbstract recommends this ponderous, but valuable, X-ray of the world’s financial imbalances to readers who want a serious analysis of the crisis.
Rolf Dobelli is the chairman of getAbstract.
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First Published: Sun, Nov 23 2008. 11 39 PM IST