Herbert GrubelProfessor 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 andUS 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 ParallelGlobal 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 2007-09 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)

Country US$ billion

China 2,243Japan 1,031Russia 387India 248

South Korea 201Brazil 201

Hong Kong 183Singapore 166

Algeria 138Germany 133

Others 2,469 Total 7,400

Assets under Management, largest Funds (2008)Country US$ billion Source

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)Country US$ billion Source

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 44Taxation

Kazakhstan National Fund 38Commodities

Brunei Investment Agency 30Commodities

Korea Investment Corporation 30

Taxation

Alaska Permanent Fund 29Commodities

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

savingsThey result in lower interest rates, which

lead to More InvestmentHigher 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 dollarFloating against Euro

Asymmetry of Imbalances:

Accumulation of assets has no limitsSize of debts is limited by ability to service

them

US Monetary Policy in PerspectiveTrue: 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 2003-07

Policy ImplicationsFuture economic and financial

stability requires the prevention of large and lasting current account imbalances, which can be achieved through:

Reduction of trade surplusesCurrency appreciationIncreased domestic spending on consumption and

investment

If imbalances persist, need sharing of deficits among Euro Area, Japan and USSupervision of IMF, BISVoluntarily

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

countriesMore domestic spending (investment) in surplus

countriesBut: Offsetting growth in demand from China,

India and other rapidly growing countries