Fascinating explainer of the relationship between the distribution of income within an economy and its trade balances. Matthew Klein and Michael Pettis make the case that a nation’s savings rate is not determined by some inherent frugal culture, but by an overconcentration of wealth which leads to low domestic demand as rich people tend to spend less of their income than poor people.
The basic thesis is that nations which have favoured domestic production over consumption (such as China) and nations which have favoured fiscal conservatism over public investment (such as Germany) have needed to export to make up for their inadequate domestic demand. They have also had to accumulate a large amount of foreign assets. These kind of nations (surplus nations) have managed to do this because of deficit nations (such as the USA).
The USA serves as the most preferred deficit nation because the dollar is the world’s reserve currency and thus it is highly sought after as a safe investment by foreign governments and corporations. This puts pressure on it to produce financial assets in order to meet the demand of surplus nations. Such demand led to the sub-prime mortgage crisis as lending standards were reduced to accommodate the desire for extra US assets. USA’s large consumer market also serves to absorb excess production from across the world at the cost of its own domestic manufacturing.
The writers suggest that nations like China should work to reduce the level of public investment and rather boost domestic consumption. They also chide Germany for focusing on fiscal conservatism when their domestic infrastructure is deteriorating.
As an explainer on trade balances (and imbalances), the book is excellent. However it does not as thoroughly explain the drivers of income inequality within each country. It explains even less how these trade imbalances are a threat to global peace. I would therefore recommend this book as a guide to understanding trade balances but perhaps some other books will cover the inequality part much better.