Global Imbalances and the Paradox of Thrift

23 Pages Posted: 2 Aug 2011

See all articles by W. Max Corden

W. Max Corden

University of Melbourne - Department of Economics

Date Written: July 1, 2011

Abstract

Global imbalances refer to current account surpluses and deficits. This is a form of international intertemporal trade, and the neoclassical approach suggests that there are gains from trade, and hence there may be no problem created by global imbalances. This paper presents qualifications to this argument. A crucial concept is the “return journey”, namely the need for borrowers to pay interest (or dividends) and eventually to be able to repay. Thus savings must lead to investment, which provides the future resources to enable the return journey.

If borrowing is used to finance current consumption, wars, or unwise (“unfruitful”) investment, such as excessive housing construction, the result will be a crisis. In this way the high net savings of some countries actually led to the recent crisis. This is a new version of Keynes’ “paradox of thrift” The central issue on which this paper focuses is the failure of high net savings by the “savings glut” countries to lead to fruitful investment in other countries, both in the United States and in developing countries. Hence a crisis was caused by the lack of provision for the return journey.

Keywords: global imbalances, paradox of thrift, financial crisis, instability of capital flows, world savings glut, quantitative easing

JEL Classification: F32, F34

Suggested Citation

Corden, W. Max, Global Imbalances and the Paradox of Thrift (July 1, 2011). Melbourne Institute Working Paper No. 20/11. Available at SSRN: https://ssrn.com/abstract=1903562 or http://dx.doi.org/10.2139/ssrn.1903562

W. Max Corden (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

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