Finacial poster

To an important extent the financial crisis has been a response to tensions built up because of the large structural current-account imbalances in the global economy. These current-account imbalances reflect some extraordinary financial relationships. The savings of thrifty households and companies in China, Japan, Germany, Taiwan or Singapore has found its way, eventually, to the pockets of bank borrowers in the United States, Spain, Australia, the United Kingdom and other countries. The vast surpluses enjoyed by the major resource- exporting economies such as Russia, Saudi Arabia and the United Arab Emirates follow similar routes as they are channelled to the governments and citizens of the major consuming economies of the West. Banks are the intermediaries that recycle these massive global flows of capital, either directly on their balance sheets or indirectly through financial markets.
How big are the flows of credit between nations? The International Monetary Fund (IMF) collects statistics on current-account surpluses and deficits that generate global capital flows. In 2007 the government and citizens of the United States – the biggest net importer – borrowed nearly $750 billion from other countries to finance their expenditures – about $2,500 a year for every man, woman and child. Spain and the United Kingdom each also borrowed around $140 billion from other countries in 2007. Australia, Italy, Greece, Turkey and France were also major borrowers, together borrowing a further $220 billion. At the other end of the scale are the major lending countries. The largest surpluses are those of the big exporters of manufactured goods. China, the biggest of them all, generated a surplus of income over expenditure of $360 billion, Japan of $212 billion and Germany of $185 billion. Not so far behind them are the major resource-exporting countries of Algeria, Iran, Kuwait, Norway, Kuwait, Russia, Saudi Arabia, and the United Arab Emirates which together generated surpluses totalling nearly $400 billion.
What do these large numbers mean? They reflect the balance of income and expenditure for the country as a whole. A current-account surplus of say $5 billion means that a country is generating $5 billion more income from all its economic activities than it is spending on goods and services. Any activity for export, including taking oil out of the ground or manufacturing products for shipment around the world, contributes to an external current-account surplus; and any goods or services purchased from foreign suppliers contribute to an external current-account deficit.
A current-account surplus of $5 billion is similar to the situation of an individual with an excess of income over expenditure of, say, $5 per day. Each day this individual saves $5 and over a year he or she would save around $1,800, investing this money in (for example) bank accounts, government bonds or corporate stocks. What is true for an individual is also true for a country. A current-account-surplus country is a net saver, investing in overseas bank deposits and securities and thus exporting its savings to other countries around the globe. These savings are mirrored by household and other borrowing in deficit countries, such as the United Kingdom, the United States and Spain.
It is helpful to express these current-account deficits as percentages of income. Spain’s deficit of 10 per cent of national product stands out; the economic adjustment necessary to cope with a deficit of this magnitude is very large indeed and its economic situation is extremely challenging, even when compared with the United States, with its 2007 deficit of 5.3 per cent of national product, or the United Kingdom (4.9 per cent) or Australia (6.2 per cent).