No one asked President Barack Obama directly about the elephant in the room on Wednesday. But he brought it up anyway, during a joint press conference with British Prime Minister Gordon Brown. A British reporter asked Obama about the proper size of government stimulus spending, and the U.S. President decided to talk about the perilous balance of global trade.
"In some ways, the world has become accustomed to the United States being a voracious consumer market and the engine that drives a lot of economic growth worldwide," Obama said, hinting that this position may not be sustainable. "We're going to have to take into account a whole host of factors that can increase our savings rate and start dealing with our long-term fiscal position as well as our current account deficits." (See pictures of the global financial crisis.)
The comments were filled with economic jargon but pregnant with meaning. "If there's going to be renewed growth, it can't just be the United States as the engine. Everybody is going to have to pick up the pace," Obama continued. He went on to say that the world would have to shift away from the situation where other nations are "only exporting and never importing" to a "balance in how we approach these issues."
The words did not make zippy sound bites, so they won't be making a heavy rotation on cable news. But they struck to the heart of an often ignored cause of the economic crisis now gripping the world. For weeks, world leaders have been blaming the crisis on the immediate villains: banks, investors and derivatives traders who took on more risk than they could handle. A regulatory structure that failed to notice the problems. A global consumer delusion that the bubble could expand forever. (Read "The G-20 Summit: Can This Group Save the World Economy?")
Largely left out, however, is the vital role that trade balances played in igniting the crisis in the first place. Since the late 1990s, the U.S. has been spending far more than it has earned, sending huge sums of capital overseas, a dynamic measured as the current account deficit. This "giant pool of money," as the radio program This American Life described it, did not stay in low-spending surplus countries like China or oil-producing states. Instead, much of it came back to the U.S. in the form of cheap credit. "Like water seeking its level, saving flowed from where it was abundant to where it was deficient, with the result that the United States and some other advanced countries experienced large capital inflows for more than a decade," explained Federal Reserve Chairman Ben Bernanke in a March 10 speech.
The glut of investment led to what economists call an "underpricing of risk," as lending standards were weakened and leverage grew. Economists now widely agree that the systemic sloshing about of capital was a recipe for disaster. If a lack of regulation allowed the fire to spread quickly, the global trade imbalance provided the dry kindling to start it.
Over the past year, government officials have been somewhat hesitant to bring the issue of trade imbalances up because it isn't as pressing as getting people back to work and restoring confidence. At the first meeting of the G-20 last fall, it was hardly mentioned at all. But as former Treasury Secretary Hank Paulson said in November, it cannot be left untreated over the long term. "The pressure from global imbalances will simply build up again until it finds another outlet," he explained. (Read "The G-20 Summit: Obama Can Stay Home.")
That is why Obama's comments on Wednesday were so notable. The issue of imbalances is not expected to play a big role in the coming G-20 communiqué, which focuses on regulation, aid to developing countries, protectionism and stimulus. But Obama clearly signaled that the issue is on his radar, and that policy shifts may be coming. In practice, this means measures in the medium term that will encourage greater consumption and spending in developing nations like China, and more saving and less debt in the U.S. Although he was vague, Obama discussed what would amount to a reworking of the basic economic physics that governs our world. It's a delicate balance, however, because too much savings in the short term could delay an economic recovery. (See pictures of the Obamas in Europe.)
This issue popped up again, in the most oblique way, later on Wednesday, when Obama met with Chinese President Hu Jintao. Although the issue of imbalances was not raised directly by either man, according to a senior U.S. Administration official, the joint statement released by the two nations said both countries want to deal with the underlying causes. "[Obama] underscored that once recovery is firmly established, the United States will act to cut the U.S. fiscal deficit in half and bring the deficit down to a level that is sustainable," the statement reads. "President Hu emphasized China's commitment to strengthen and improve macroeconomic control and expand domestic demand, particularly consumer demand, to ensure sustainable growth and ensure steady and relatively fast economic development."
In other words, China will seek to spend more, and the U.S. will seek to spend less. Many economists are critical of the lack of specific policy solutions beyond these acknowledgements, saying the imbalances and the resulting distorting effects on currency exchange rates should have been a central agenda item at the G-20. "Unless and until surplus countries recognize that this cannot continue, no durable escape from the crisis will be achieved," Martin Wolf, author of Fixing Global Finance and the Financial Times' economics columnist, wrote in Wednesday's edition. "Understandably, but foolishly, they are unwilling to do so." But as Wednesday showed, the issue is not entirely unnoticed by senior leaders. The elephant in the room, after all, is large, threatening and unlikely to go away on its own.