by Michael Pettis Europe’s underlying problem is not budget deficits or even unsustainable debt. These are mainly symptoms. The real problem with Europe is the huge divergence in costs between the core and the periphery – in the past decade costs between Germany and some of the peripheral countries have diverged by anywhere from 20% …
From 01Jan2007 thru 31Mar2011, GDP (not adjusted for inflation) increased 10.2%, while the trade deficit (unadjusted for inflation) declined 13%. If real dollars are used (inflation adjusted), the trade deficit has declined 35% since the beginning of 2007.
Over the last 4 years, the trade balance has been improving. Over the last 9 months, the trend is clearly towards a less bad trade deficit. This is caused by exporting more “things” and importing less “things”.
There is a possibility that protracted inflation in China could contribute to a curative effect on the negative current account balance of the U.S. However, the complexities involved do not make that outcome a foregone conclusion. Part of the impacts will involve increased costs for imported goods in the U.S. and another could be an increase in U.S. exports and improvement in American wages. Prof. Chinn points out some of the complex trade-offs that impact the ossible outcome scenarios.