THE GREAT REBALANCING: TRADE, CONFLICT AND THE PERILOUS ROAD AHEAD FOR THE WORLD by Michael Pettis

John Wiley & Sons 2012. ISBN 978-1118157794

In this interesting book, Micheal Pettis presents the familiar story of un-balanced world trade, principally between China and the USA and the clone situation in Europe between Northern Europe ( typified in the text by Germany) and Southern Europe (typified by Spain).

In this reviewer's opinion, it is worth buying the book just for the chart on P.209 showing how capital (savings) can be used in a closed world system.

A key point is that an investment has to be able to generate enough return to repay the loan and interest , which seems quite obvious but is all but forgotten in 21st century economics. His table lists a fine collection of economic dead ends such as, investing in factories, inventories and real estate when there is no demand, using credit to finance consumption or using QE to fuel speculative bubbles.

Essentially the only investments where the author finds of any real value are the rare situations such as the US in the19th century or Europe and Japan rebuilding after WW2 where real productive investment opportunities abounded. Without opportunities like these, his table shows that excess production leads to unemployment making a very simple "real"cycle of valid investment and valid divestment.

Apart from this, there does seem to be a problem with issues that probably should be in the book and aren't.

For example, the author emphasizes the "automatic" nature of trade and capital flows as a national accounting identity when the same identities would apply in a much less interesting manner to the case of a fully protectionist world economy. So it seems that he is essentially talking about the predictable imbalances produced by the dominant Neo-Liberal world free market system and he could have gone directly to the point and evaluated Neoliberalism as an economic philosophy (world neo-liberalism = large trade imbalances).

He goes at some length into Chinese over investment validated by capturing export markets. Export production compensates for (relatively) feeble Chinese domestic consumption with its lagging wage growth, undervalued currency and artificially low interest rates. However, he doesn't evaluate other aspects of the "Export Model" that are considered to be important. For example Dani Rodrik in his book, "The Globalization Paradox: Why Global Markets, States, and Democracy Can't Coexist" shows the Chinese government's support for the Export Model with its associated development arguments. Export industries generate higher employment (than importers), they help China climb the technology curve and they allow China to develop new industries based on foreign demand. (top)		 The author could perhaps also have shown these factors having a mirror image in the US. The "Import Model" reduces American manufacturing employment, helps the US miss out on new technologies (eg flat screens) and in fact to lose whole industries with their supplier networks. The suggestion seems to be that this is basically OK in return for the benefit of a flood of underpriced imported goods.

Pettis throws a bone to the Positive Economics crowd with his quick dismissal of normative issues in referring to the futility of, ",,,, moralizing about the virtues of thrift and hard work and by making grand statements about the cultural determinants of success", the problem here being that it is difficult to read a book like Joe Studwell's "Asian Godfathers: Money and Power in Hong Kong and South East Asia" without wondering about cultural differences in the divergent economic trajectories of NE Asia and SE Asia. The governments of South Korea and the Philippines work in very different ways. It is also something of a stretch to disregard European cultural issues when comparing the societies of Scandinavia with those of Southern Italy or Greece. Perhaps he could have looked at the evidence that societies go through cycles, so just because Weimar Germany was famously corrupt and decadent in the 1920's doesn't mean that it has to be that way today. Joseph Heath's recent book, "Morality, Competition, and the Firm: The Market Failures Approach to Business Ethics" for example, convincingly shows the need for ethical standards (not just legal requirements) within the firm for economic development.

The author also seems to dodge some efficiency arguments. He presents German savings and overinvestment within a single currency Euro zone as oppressing Spain by underpricing Spanish imports and overpricing Spanish exports (forcing it into deficits), and he suggests that Spain can only find freedom by breaking away from the Euro and devaluing (the Peseta?). This is one way of looking at it, but personal experience of Spanish business for the last 30 years shows that the country has always resolved efficiency problems by devaluing the Peseta with the implicit associated inflation tax on asset holders. Now for the first time in decades, money retains its value and asset and labour costs are painfully adjusting to reality with the average efficiency of Spanish business fast improving.

In fact Spain seems to be gaining competitiveness and efficiency through deleveraging while neo-liberals elsewhere resist deleveraging with massive QE to force the public and industry to make the unsustainable investments as identified on the P.209 chart?

This reviewer would opt for 3) with a long term stagnation in growth and employment (particularly the quality kind).