Nova workboard

a blog from young economists at Nova SBE

A change in trade patterns

                As we can read in Bernanke‘s paper „The Global Saving Glut and the U.S. Current Account Deficit“ [1], there is one issue, which still evokes concern among economists and policymakers, namely the U.S. nation’s large and growing current account deficit and the fact of “global imbalances”. This topic is also discussed in an article by David Backus and Thomas Cooley [2]. The following summary is based on these two articles.

                 In the 1920s the capital started to move from developed countries, like the United States and England, to less developed countries, where the capital has been used more productively. The whole 19th century was characterized by these capital flows. But this is no longer true nowadays.  Now the pattern of capital flows has changed. The U.S. is recently experiencing a trade imbalance, in this case imports exceeding exports. The U.S. has become the most notable importer of capital goods.

                But why the pattern of capital flows changed and imports of capital flooded the U.S. and the current account deficit of the U. S. is growing? Here are some reasons, which are important to mention:

  • The capital inflows to some of the developing countries were not always productively used (banking system failed to allocate the funds to projects with high returns, a financial crises, etc.) and so emerging markets of developing countries were forced into a new strategy, which involved shifting from being net importer to being net exporter of capital.
  • The U. S. Dollar is the international reserve currency. Speculations about replacing the dollar by other currencies are not coming true in the near future.
  • The U. S. has one of the most investor-friendly capital markets on the world and an attractive regulatory environment with a low political risk and strong property rights.
  • Because of the well-known liquidity of the U.S. Treasuries, investors did not increase interests rates on the debt during the crisis, even though the U.S. where the starting point of the financial crisis.
  • Demographic development in the U.S. is also very investor-friendly: the number of young and middle-age workers is high. The capital flows rather to the U. S., where aging is slower than in the EU, Japan or China. There population growth is much faster and so there will be more retired people than economically active people.
  • From a trade perspective, the strong dollar made U.S. imports cheap (in terms of dollars) and exports more expensive (in terms of foreign currencies) which increases the trade imbalance.

               Some people are blaming these capital flows for the financial crisis and call the global imbalance unsustainable. Therefore it is really important to take global imbalances into consideration. As U.S. Treasury Secretary Henry Paulson said: “If we only address particular regulatory issues – as critical as they are – without addressing the global imbalances that fueled recent excess, we will have missed an opportunity to dramatically improve the foundation for global markets and economic vitally going forward.” [2]


Soňa Dereniková

Nova SBE


[1] Ben S. BERNANKE: ”The Global Saving Glut and the U.S. Current Account Deficit”, March 2005, The Federal Reserve Board,

[2] David BACKUS, Thomas COOLEY: “Global ‘Imbalances’ and the Crisis“, January 2010, The Wall Streeet Journal.

Author: studentnovasbe

Master student in Nova Sbe

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