Pettis: Capital Flooding Into US as Global Trade Environment Deteriorates

Stock markets continue to roar higher on better global economic data and expectations for pro-growth policies from the US. Beneath the surface, however, it appears that capital is herding in a manner similar to prior market booms that didn’t end too well.
This time on FS Insider, we spoke with Michael Pettis, a finance professor at Peking University and senior associate for the Carnegie Endowment for International Peace, about his views on capital flows, trade imbalances, and what they mean for the world economy in the future.
Imbalances Worsening
Trade imbalances, particularly in Europe, have worsened since Pettis wrote his book, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy, a few years back.
The reason for the current imbalance is because Germany has been running huge surpluses, and because of the rules of the Euro, countries such as Spain, Italy, France, and Portugal, have been prevented from adjusting. As a result, these high-inflation countries with converging interest rates ended up with negative real interest rates.

This post was published at FinancialSense on 02/22/2017.

 

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