¶ It has been a long time since last we looked at Crooked Timber, and never mind why just now. Glancing at the site this morning, we came across a repost from 2011, by Daniel Davies, about “the bezzle.” The bezzle is the net gain in (purely imaginary) psychic wealth that accrues when an embezzler makes use of funds that the proper owner still believes he controls. Davies applies this concept, originated by Galbraith, to explain the “crash” of 2008, in which “the bezzle” — house prices, in Davies’s view (we agree) — was revealed as such. The question remains: who was the embezzler? Or, better, what, since this catastrophe is wonderfully free of personal responsibility. Davies points to grave trade imbalances (we agree again).
And it should be clear what we’re talking about here to anyone who has paid even a bit of attention for the last twenty years; the Great Trans-pacific Imbalance. The “savings glut”, the “China effect”, what have you. Basically, the consequence of a) Chinese (also Asian, also to a limited extent other emerging markets) decision to run a large trade surplus as part of a strategy of industrialisation (or because they wanted to be sure never to end up in the position of 1998 Indonesia, or something else), combined with b) the decision on the part of Europe and the USA to accomodate this policy through substantial real appreciation of their own currencies.
If you are importing capital, then the foreign sector surplus has to show up as a deficit in some other sector, mathematically. In the USA it showed up as a deficit in the personal sector, with the increase in indebtedness financing an asset price inflation. In Euroland, it showed up mainly as a big increase in government sector deficit (which in turn piled up in the peripheral European sovereigns, which also ran structural bilateral deficits with Germany), which financed ten years of the Greek policy of “low tax collection and a generous state”, although Spain also had a real estate bubble.
There is a temptation to say that this, in some way, reflect power structures – that in the USA, the political importance and power of the financial sector made it highly likely that the eventual destination of the trans-Pacific capital flows would end up in an asset bubble, while the different power structures of Greece made it more likely that they would be channeled to the locally more politically powerful clients. That’s tempting, and it might even have been right. But it seems more likely to me that things just followed the path of least local resistance, and that in each country, the natural and easiest borrowing sector ended up picking up the deficit. On this analysis, Germany, Australia and Canada came out OK (so far, and Australia has actually had a big run-up in personal debt) because for one reason or another, they had a large enough surplus on their own export trade to offset the capital account imbalance.
Crooked Timber is aptly named, because it all too often makes for thorny reading. (Davies’s repost still needs editing.) But some topics are inherently daunting, and it’s not easy to see why Greece and the United States are in such similar boats. Daniel Davies offers worthy explanation. We only wish that he had gone on to point out that the Chinese “strategy of industrialisation” depended on the existence of an official United States policy not to prohibit the withdrawal of American capital from American industry, a withdrawal that occurred because Chinese labor was so much cheaper. We cannot avert our gaze from this skull-and-crossbones aspect of Free Trade.