Herbert Grubel Professor of Economics (Emeritus), Simon Fraser University Senior Fellow, The Fraser Institute Presentation at the III Astana Economic Forum, Kazakhstan, on July 2, 2010

Competing Propositions Recession Caused by 1. Excessively easy US Monetary Policies 2. Current Account Imbalances of some countries, used to buy securities for  Central Bank Reserves  Sovereign Wealth Funds

Importance of Issue Once Recession has ended and US monetary policy is flawless: If problems were caused by imbalances and they continue: Imbalances will sooner or later result in another global financial crisis

Note Historic Parallel Global economic crisis during 1970s, widely seen as due to “recycling of petro-dollars”:  Energy producers have large payments surpluses, which they deposited with banks in industrial countries  Commercial banks lent to developing countries  Developing countries ended up unable to service debts Great Recession of due to:  Some key countries and energy producers run large payments surpluses  Central Banks and Sovereign Wealth Funds of these countries bought US financial debt instruments  US issuers of debt instruments ended up unable to service debts

Basis of “Fed at Fault”

Official Foreign Exchange Reserves (end of 2008) CountryUS$ billion China2,243 Japan1,031 Russia387 India248 South Korea201 Brazil201 Hong Kong183 Singapore166 Algeria138 Germany133 Others2,469 Total7,400

Assets under Management, largest Funds (2008) CountryUS$ billionSource Abu Dhabi Investment Authority (UAE) 875 Commodities SAMA Foreign Holdings (Saudi Arabia) 433 Commodities Government of Singapore Investment Corp 330 Taxation SAFE Investment Company (China) 312 Taxation Government Pension Fund of Norway 301 Commodities Kuwait Investment Authority 265 Commodities National Welfare Fund (Russia) 225 Commodities China Investment Corporation 200 Taxation Hong Kong Monetary Authority Invest. Portfolio 173 Taxation Temasek Holdings (Singapore) 134 Taxation

Assets under Management, smaller Funds (2008) CountryUS$ billionSource Investment Corporation of Dubai 82 Commodities National Social Security Fund (China) 74 Taxation Qatar Investment Authority 60 Commodities Libyan Investment Authority 50 Commodities Revenue Regulation Fund (Algeria) 47 Commodities Australian Future Fund 44 Taxation Kazakhstan National Fund 38 Commodities Brunei Investment Agency 30 Commodities Korea Investment Corporation 30 Taxation Alaska Permanent Fund 29 Commodities Other 168 Total All Funds 3,900

Total Size of Assets Held in 2008 Assets held by central banks and sovereign wealth funds: $11.3 trillion Perspective: Total US federal debt held by the public $6.1 trillion

Are Global Surpluses Good or Bad? In theory, they are good: They represent increases in global savings They result in lower interest rates, which lead to More Investment Higher Economic Growth In fact they are bad because: They flowed into one country only (US) They have become too large

Current Account Balances (percent of world GDP)

Why US Inflows and Problems? China and commodity producers had exchange rates: Fixed against US dollar Floating against Euro Asymmetry of Imbalances: Accumulation of assets has no limits Size of debts is limited by ability to service them

US Monetary Policy in Perspective True: Easy monetary policy enabled the maintenance of surpluses by China and commodity exporters But: Tight US monetary policy would have led to global recession unless controlled economies would have reduced surpluses and Europe and Japan had run deficits and sold financial assets to surplus countries Questionable: Postulated adjustments Fact: US monetary policy enabled very rapid economic growth in all countries

Policy Implications Future economic and financial stability requires the prevention of large and lasting current account imbalances, which can be achieved through: Reduction of trade surpluses Currency appreciation Increased domestic spending on consumption and investment If imbalances persist, need sharing of deficits among Euro Area, Japan and US Supervision of IMF, BIS Voluntarily

Optimistic Outlook for Needed Policies? China moves in needed direction:  Increase in value of yuan  Increases in wages and domestic consumption  Foxconn and Toyota episodes, more to come?  Prospects for significant reduction in surpluses of energy producers??  Development of alternative supplies in user countries  More domestic spending (investment) in surplus countries  But: Offsetting growth in demand from China, India and other rapidly growing countries