In this section so far, we've had a look at the Balance of Payments, we've had a look at how it records all of the different transactions, economic transactions among countries in the world, and we've seen that they add up to zero both on the current and financial account. The two sides have to balance. So, a current account deficit has to be compensated with the financial account surplus, and a current account surplus has to be compensated with financial account deficit. So, we've seen that they add up to zero but also, globally they add up to zero. So, if there is a deficit somewhere, there needs to be a surplus somewhere else, and vice versa. We've seen some of the things that tend to drive these deficits or surpluses. Savings rates drive a surplus, aging can drive a surplus. Being a reserve currency can drive a deficit, or being a very attractive investment environment can drive a deficit. But above all, the bottom line that we want to remember is that a country tends to have current account deficit because it spends more than it produces. And, a country tends to have current account surpluses because it produces more than it spends being a saver country. The question we want to ask as we wrap this up is, what kind of a Global Growth Model does this lead us to and is it stable? We've seen that global growth relies on their being deficit countries so, that surplus countries can retain faster rates of growth, or can be bigger. When that happens, we see the deficit countries building up debt. And, we see that sometimes, as in the global financial crisis, this can be a problem. There's a source of instability there in the world that is accumulating as these current account deficits and surpluses are chronic in the same countries. It would be better if countries took turns. I mean, imagine that you say, "Okay. You've got five years to be a deficit country. You can do that bar from the rest of the world. Now, you got to move over the other side and be surplus." That would be nice because then, for five years I would accumulate debt and then for five years I would pay it off. But of course, the global economy is not regulated that way. Countries do what they want to. If they want to borrow and they can borrow, they will. If they want to save and they can save, they will. And so, we do have these debt buildups coming in the same countries year after year. And, we have in the surplus countries, the exposure to all of these foreign assets often in a foreign currency. And, this is a source of instability for the world. But, countries are that way for structural reasons. The surplus countries as we said, tend to be surplus countries maybe because they're aging, maybe because they like to save for cultural reasons, maybe because they have a powerful natural resource sector, or maybe because they wanted to grow fast, they wanted to develop fast and they needed positive net exports to drive them. The countries that are current account deficit countries are that way because maybe they have the reserve currency, as we've said, maybe they are an attractive investment environment, maybe they just have a habit of borrowing and acceptance of debt. And so, we have this source of instability growing in the world. What can we do about it? There's not very much we can do, but it's hard to think that the only way we can correct this is by having cyclical financial crisis. If we were to be a little more sensible, we would probably want to find a world where these deficits and surpluses were closer to one another, where you don't have very large deficits on one side and very large surpluses on the other side. However, to get to that place would require us to be a little bit different. The countries with current account deficits would have to be countries that try harder to balance their government budget for instance, so that public dissaving is not so great. Or, that try harder to not have people borrow so much, maybe by raising interest rates or eliminating incentives to borrowing, like tax deductions for interest. The surplus countries would have to try harder to be closer to balance by saving less, or the government spending more. Really, the true bottom line I think is that these global imbalances lead us to a world where we are all, if you will supersized. The deficit countries are bigger than they should be because they borrow in order to consume more than they produce. But, the surplus countries are also bigger than they should be because they rely on foreign demand in order to grow more and become bigger than they could be based on their own domestic demand. And so, we are all living beyond our means, aren't we? It's not just the deficit countries living beyond their means. It's also the surplus countries living beyond their means as they rely on excess demand in the deficit countries to drive them. And, this gives them the vulnerability, the exposure to foreign demand, the exposure to their currency. If we were all to move closer to balance, what would happen? Well, the world would grow more slowly. And this is clear, if those deficits get smaller, the surpluses have to get smaller. We'll all maybe be a little smaller, a little more modest, a little closer to our possibilities. Maybe that would be a better world. At the present time, these imbalances that are built into the Global Growth Model give us a vulnerability to debt buildups, to periodic financial crisis, that may not be the best thing for the world.
