Hi! Thanks for another interesting question.
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I will provide you with small snippets from the some of the articles I
will cite so as to save you time. But just like before, I highly
recommend that you read them in their entirety to get a better grasp
of the concepts.
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If we will take the perspectives of economists and historians, such
economic imbalances indeed pose such serious risks.
Historically global economic imbalances have dramatic effects on
regional economies. Let us first look at this wonderful paper
detailing the spiraling effects of global economic imbalances.
1. The 1987 Asian Crisis Recovery Process
?The collapse of domestic financial systems and asset prices in the
crisis countries made it difficult for their domestic producers to
finance the production of increased exports and the imports that were
required to produce them. Although foreign balances did improve very
quickly, it was initially a downward adjustment in which imports
virtually ceased and exports declined, causing overall incomes to
fall.?
?The negative consequences of the crisis-induced decline in primary
commodity prices became evident in the decline in export revenues in
Russia. Since the Russian government was excessively dependent on
these revenues for income, and the Central Bank was dependent on them
for foreign currency, this led to a sharp reversal in the Russian
balance of payments, a default on government debt and a collapse in
the ruble exchange rate.4 Since a large number of developed country
financial institutions were exposed either directly or indirectly
through their holdings of Russian government debt, the default was
quickly transmuted into sharply reduced earnings or even insolvency
and bankruptcy for some of the strongest developed country financial
institutions??
2. Imbalances between US, Europe and Japan
?The lack of policy coordination between the US, Europe and Japan in
both the 1960s and the 1980s, and the increasing difficulty in
employing counter-cyclical fiscal policies, meant that monetary policy
became the sole instrument. As a result, policy conflicts emerged in
terms of disruptive interest rate differentials and disruptions in
exchange rates.?
3. A US Downturn
?Since the US has been the major source of global demand, the impact
of slower US growth on its external deficit is likely to have a direct
impact on global conditions.?
?Policy Options for Advanced Countries to Address Current and Future
Global Economic Imbalances? (Forum on Debt and Development)
http://www.fondad.org/publications/imbalances/Fondad-imbalances-Part1.pdf
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After looking at the historical perspectives let us see what the
economists have to say about seriousness of the risks involved in
world economic imbalances.
?Our central forecast implies robust global growth over the next five
years. However, important risks stem from large economic imbalances in
key countries. The huge US current-account deficit poses a threat. The
size of private-sector debt in the US, and to a lesser extent in
Europe, is also a cause for concern, as are public-debt burdens in a
number of OECD countries. Balance sheets look stretched and savings
could increase markedly in many countries.?
- ?This would result in declines in spending and an economic slowdown.?
- ?A connected threat is that of another downward turn in the equities
market, which would put paid to any revival in M&As.? (M&A ? Mergers
and Acquisitions)
?World investment prospects The revival of globalisation?? (The Economist)
http://graphics.eiu.com/files/ad_pdfs/WIP_2004.pdf
- ?For the United States, a dollar that is allowed to float more
freely against its major trading partners' currencies is a weaker
dollar?Because a weakening dollar puts upward pressure on interest
rates, it tends to discourage borrowing and spending while encouraging
saving. The effect on other countries, which would be seeing their
currencies strengthen, would be just the opposite.?
- ?For other (admittedly lesser) economies, current account deficits
above 5 percent have to translate into currency collapses? Such
currency crashes are big enough blows for the world financial system
when they occur in emerging markets; a dollar crash would be a
nightmare scenario.?
- ?Asilis believes that part of the adjustment will entail further
selling in U.S. Treasuries as foreign central banks curtail their
buying and global investors, wary of the weakening dollar, shift
assets elsewhere.?
?A world out of whack? by Justin Lahart (CNN Money)
http://money.cnn.com/2003/09/23/markets/balance/
- ?Dampening demand in the USA would reduce the foreign trade deficit
there, but this ?option? is unrealistic as it would clearly run
counter to US economic policy targets. A weaker economy in the USA
would, moreover, rebound unfavourably on economic developments in
other regions of the world.?
- ?The depreciation of the dollar thus remains the most important
potential adjustment mechanism. However, a further rapid depreciation
against the euro and the yen would place excessive strain on the
adjustment capabilities of the euro area and Japan and so at least
endanger the economic recovery in these countries.?
- ?An interest rate risk is also linked to the risk of stronger shifts
in exchange rates. An ebbing capital inflow into the USA or less
investment of the still increasing East Asian foreign exchange
reserves in long-term US bonds could lead to a rapid increase in
long-term interest rates in the USA. This increase would probably
spread to other countries as a result of the close interconnection of
international interest rates and high budget deficits in most
industrialised countries. In view of the high level of indebtedness
among private households ? in Europe too ? this would lead to a
considerable loss of wealth and a necessity to save.?
?Marked Recovery in the World Economy? Günter Weinert (Hamburg
Institute of International Economics)
http://www.hwwa.de/Publikationen/Intereconomics/2004/ie_docs2004/ie0401-economic_trends.pdf
- ?Policy interest rates are exceptionally low in most industrial
countries: zero in Japan and Switzerland, 1 percent in the United
States, 2 percent in the euro area, and at or near historic lows in
the United Kingdom and Canada?The very low level of policy interest
rates is an imbalance (relative to normal conditions) that reflects
exceptionally easy monetary policies to combat economic weakness. This
policy imbalance poses an important challenge for the future conduct
of monetary policy. Situations of low policy interest rates and low
inflation tend to be associated with unusual inertia in the processes
of general price inflation, which makes traditional indicators of
rising inflationary pressures less reliable as measures of the need to
begin to tighten monetary conditions.?
- ?On the other hand, if monetary policy remains too easy for too long
(perhaps because subdued general price inflation gives no clear signal
of the need for monetary tightening), then large asset price anomalies
may develop before corrective action is taken.?
- ?Another important policy imbalance of global significance is the
medium- and long-term fiscal imbalance of most industrial countries?
These problems imply that, even in the near term, expansionary fiscal
policy cannot prudently be used as a significant means for stimulating
more rapid growth of aggregate demand in the industrial countries. To
the extent that such stimulus may be needed, monetary policy is the
prudent tool. But, as just noted, monetary policy does not at present
have much remaining capacity to play this role and may not regain this
capacity any time soon.?
?Global Economic Prospects: Bright for 2004 but with Questions
Thereafter? by Michael Mussa (Institute for International Economics)
http://www.iie.com/publications/papers/mussa0404.htm
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Just like in my first answer about the US current account deficit, it
is my belief that such imbalances are not a real concern for the
United States. Being the center of global economy, economic cycles
will adjust around it. Sure the US will experience some slowdown for
a few years but since it has a hold of the cycle of trade and capital
inflows around the world, it can use its monetary policies like the
hiking of interest rates by the FED to adjust the inflow of dollars
curbing inflation and then at just the right time relax such
tightening pressures so that it can make its domestic economy dynamic
again.
The real concerns are effects on the rest of the world. Sure the
industrialized countries can recover but how much damage will they be
absorbing? A greater concern will perhaps be the Third World countries
because recovery could come only after years of hardships.
Search terms used:
possible effects world global "economic imbalances"
I hope these links would help you in your research. Before rating this
answer, please ask for a clarification if you have a question or if
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Regards,
Easterangel-ga
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