The Blind Men and the Elephant

This paper analyzes the conflicting explanations of the global imbalances’ pattern and the size of the US external deficit. In this document, it is argued that, far from being incompatible, the explanations suggested are part of a broader story. The drop of the US saving rate has played a significant role in the onset of imbalances in the United States and the world at large. At the same time, favorable productivity trends turned the United States into a good place to invest, thus attracting the external savings that help finance the American investment and its current account. The excess of global savings is also a factor to be taken into account since it supports capital flows to the United States and investment in this country. Lastly, the view of the Sino-American co-dependence underlines the satisfaction level of Asian countries with a situation in which the demand for exports is disproportionately important relative to domestic demand (due to a combination of high risk aversion after the 1997-1998 crisis and an ongoing commitment with export-led growth), a position sustained through undervalued exchange rates and evidenced by the accelerated growth of US imports.