Why do trade imbalances matter? Martin Wolf explains | FT Comment

[0:07]Global imbalances occur when some countries run a trade surplus and so at the same time export an exactly matching part of their savings. This might seem to be a good thing for the rest of the world. After all, countries importing foreigners surplus savings can spend more than they actually earn. If only it was so simple. The people who sent their savings abroad will want them back at some point, so they want to be sure their money is safe. And if they ever fear the people they lent the money to won't be able to pay it back, they will stop lending, sometimes quite suddenly. Economists call this a sudden stop. When the money stops flowing, the countries that used to run deficits have to stop doing so. The best way to do this is to export more. This requires people in surplus countries to spend and import more than before, something many of them are unwilling to do. Also, the imported funds were mostly invested in things like houses, offices and shopping malls, not goods and services that can be exported. So deficit countries are forced to slash spending on imports instead, which drives them into recession. This then leads to a decline in demand for goods and services from the exporting countries, which also then fall into recession. Economies stall, unemployment rises, and everyone blames everyone else for the mess. So the view that large surpluses and deficits do not matter is only true in theory. Practice is quite another matter.