Global re-balancing

In the discussion about where the world economy is headed, the term global re-balancing is often used.  What does this mean? Does it suggest something is out of balance in world finances and, therefore, must be brought back in balance? N.C. State University economist Mike Walden responds.

“Well … your answer’s yes. And let me give you background. This discussion really involves two countries, the U.S. and China. And what China has been doing is purposely holding back internal consumer spending — that is, putting a lid on what their households can spend in order to generate savings that they can invest both domestically as well as internationally. Now the domestic saving is being used in China to build factories and infrastructure. The international savings is used to buy investments, mainly here from the U.S. But by doing so, what China is contributing to, at least in the U.S., is very low interest rates. And so it is making borrowing or has made borrowing more attractive in the U.S., and it’s made spending look better than saving in the U.S.

“And this, many economists say, is the imbalance. And they say that eventually China’s going to have to let its domestic consumer spending increase, which will mean less for China to invest in the U.S., which will mean higher U.S. interest rates, less consumer spending, but more saving here in the U.S.

“And that will be a very different economic environment, particularly here for U.S. households, than we’ve seen in the past.”