Later this week, President Obama and Treasury Secretary Timothy Geithner join other world leaders in a G-20 meeting in Seoul, South Korea.to address an agenda (http://tinyurl.com/24odlxl ) that includes "build on this less-than-robust recovery and further enhance international cooperation to generate strong, sustainable and balanced growth." The world for some time now has grown in an unblanced way, with emerging countries like China enjoying above average savings and investment but below average consumption, while developed countries like the U.S. had high levels of consumption and low levels of savings and investment.
Certainly, a rebalancing must occur. However if that rebalancing occurs too rapidly, the effects of reducing consumption in the U.S. could cause significant global economic problems including another dip into recession in the U.S. Each country sees the manner and timing of this global rebalancing differently.
China and the U.S. are the 2 most important players in this rebalancing. In China consumption represents approximately 36% of GDP, while savings and investment is about 50% of GDP. Consider the U.S. where consumer spending is about 70% of GDP while the savings rate is around 5%. There is a neat diagram of components of GDP at http://www.moneychimp.com/articles/econ/gdp_diagram.htm.
It will take a long time to rebalance China and the U.S. to something significantly different than their present components of GDP. Also, the rebalance will periodically happen in sudden and unsettling fashion. As governments take different approaches to the rebalance we should all be hopeful that G-20 and other vehicles can help the world avoid problems as much as possible.
