The Great Imbalance - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 6 October 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
In today's global economy, there are many potential headwinds we can talk about. The Eurozone debt crisis is one of the first that comes to mind. Another is slowing global economic growth, and including Indian growth rates falling to a multi-year low. All of these are medium term issues. This week, I would instead like to talk about a long-term economic issue, termed 'The Great Imbalance'.

Imagine there are two countries, A and B. Country B produces goods, and country A buys them. With the income that country B earns, they invest it back in country A. Country A uses the additional money to buy more goods from country B, and the cycle continues. In the end, country A ends up with a lot of goods, and country B with a lot of money.

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Can you think of two countries that fit the above description? The answer is the two largest economies in the world, the US and China. The US imports a high number of goods from China, and pays them in dollars. China invests those dollars back into the US by buying treasury bonds. Over time, the US ends up with a lot of Chinese goods, and China ends up with increasing holdings of US debt.

Does this sound like a stable trading relationship? Of course not. This kind of trading relationship is a recipe for disaster. Over time, this builds up a large imbalance between the two countries. The US is heavily indebted to China, and China is heavily dependent on its exports to the US.

In the short-term, both countries seem to benefit from the status quo. The US can purchase goods at low prices, and can continue to fund their deficits at low interest rates. China gets to keep exporting a high number of goods, thereby improving their own economic and employment situation.

In the long-term, this imbalance is going to create a lot of problems. Eventually, the US still struggle to meet the increasing debt obligations. The only way they will be able to do so is by devaluing the dollar relative to the Chinese renminbi. When this occurs, their capacity to import from China will fall.

On the Chinese side, their holdings of treasury bonds will fall in value relative to their own currency. Their exports will be harmed. Eventually, they will need to reach a new equilibrium whereby there isn't a huge imbalance between imports and exports to the US.

The great imbalance is not a short-term issue that is going to cause a crisis. It is a long-term issue that is going to change the way the global economy operates. And it will have a significant impact on the markets.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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4 Responses to "The Great Imbalance"

shaheen mohmad ashraf

Oct 11, 2012

MR asad is more expert then all of us , but he forgets that he is talking of USA a brand in itself. There will be no imbalance , no problim in future , brand USA has capacity and potential to rejuvenerate , so long as strong govts rule USA it will increase its capacity to repay its debt whethr to china or any other nation . I belive USA will sooner or later come out of present crississ pushed into maniac father/son duo i mean bushes with their cowboy war mongring mentality.

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Rajiv Phadke

Oct 8, 2012

Agree with yr thinking and the same seems to have happened in Europe between Germany and southern european( PIGS) nations, who are facing unsustainable levels of debt and negative/stagnant GDP growth.. US too is heading the PIGS way, unless something majorly positive happens there soon.

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Kuldeep Nayar

Oct 7, 2012

Russian Roulette on the economic battlefield. Sure sign of suicide for both of them. Wonder why the Chinese are buying gold in such large quantities though! To counter the US devaluation?

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Sthithapragnja

Oct 7, 2012

Eq.Master Team,
My humble kudos for the simplistic presentation of a highly technical(Economic Terms)
subject matter as exchange rate,export , import, currency valuations ,trade imbalance etc.etc in a language THAT AN AAM AADMI COULD EASILY UNDERSTAND!!

I can also appreciate with abundant admiration the visionary prognosis of a fast approaching scenario that is hurtling towards the two largest economies of the world
Viz America and China !! The only question that emerges is When or HOW fast ?
I hasten to conclude Asad Dossani Ji !!

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