Perpetual Imbalance

The notion of a “balance of nature” stretches back to early Greeks, who believed gods maintained it with the aid of human prayers, sacrifices, and rituals. As Greek philosophers developed the idea of natural laws, human assistance in maintaining the balance did not disappear but was de-emphasized. The dominance of a constantly intervening God in the Middle Ages lessened interest in the inherent features of nature that would contribute to balance, but the Reformation led to renewed focus on such features. Darwin conceived of nature in balance, and his emphasis on competition and frequent tales of felicitous species interactions supported the idea of a balance of nature. Alfred Wallace around 1855 was perhaps the first to challenge the very notion of a balance of nature. In particular, Wallace asked how “balance” could be defined in such a way that a balance of nature could be a testable hypothesis. In any case, the balance-of-nature metaphor lives on in large segments of the public imagination.

  A    perpetually falling  geostationary satellite orbit  s the Earth.

A perpetually falling geostationary satellite orbits the Earth.

Wallace's original question—how to define “balance”—would be raised again, but this time not in the field of ecology but in economics. “One of the reasons,” according to Sanjeev Sanyal, “that mainstream economists get worked up about global imbalances is that they remain endearingly loyal to the idea of the 'equilibrium' — the intellectual legacy of Newtonian mechanics and Victorian engineering.” He argued that seeing the world as a complex, adaptive systems, imbalance may actually be the natural state of the global economy. In fact, his research indicates that “virtually every period of globalization and prosperity through two thousand years of history has been accompanied by symbiotic imbalances.”

For instance, in the first and second centuries AD, the world economy was driven by Indo-Roman trade. Throughout that period, India ran a current account surplus and the Romans kept complaining about the loss of gold — but the system endured for a very long time. Therefore, Sanyal suggested that the absorption of China's pipeline of surpluses will require the world to return to an age of current account imbalances. And the trajectory of the world economy will be determined largely by how it adapts to this reality rather than by some pre-conceived notion of balance.

The scale of capital outflow from China could be so large that it may hold down the long-term cost of capital globally for many years irrespective of how much central banks in the rest of the world tighten monetary policy. This is due to the important role that China's savings-investment dynamic plays in the evolution of global imbalances; and that China will soon experience a very rapid decline in the proportion of population of working age (defined here as between 15 to 59 years of age). Experience suggests that in a rapidly aging society, the investment declines can outpace the savings rate by larger margins. China currently has the lion's share of world investments (ahead of U.S.); so as the pace of investment slows in the years ahead, it will generate very large current account surpluses over a prolonged period.

An appreciation of the yuan is unlikely to correct for these surpluses and may perversely add to them. A higher yuan will depress investment in the tradable sector that, in turn, could further feed the surplus. In other words, the loss of competitiveness is more than compensated by the decline in investment over a prolonged period. A case in point is that of Japan in the mid-eighties, where the appreciation of the Yen was followed by larger current account surpluses over the next 30 years even though Japan was constantly losing competitiveness throughout this period. This is totally contrary to what mainstream economists would expect.

A revival of infrastructure investment in the developed world, in particular the U.S., would contribute meaningfully to global economic growth. But it is more likely that surplus capital would be channeled into infrastructure projects around Asia through initiatives like AIIB or the Silk Road infrastructure fund. Without such investments, we might have to reconcile ourselves to mediocre growth, depressed yields, and high asset prices (especially trophy assets) all over the world. It would seem that to keep the world in balance, one might have to first step out of balance into a perpetual fall, while redirecting the forces into a trajectory like that of the geosynchronous satellite orbiting the Earth and yet appears stationary at one point in the sky.

References:

  1. Ferguson, Niall and Schularick, Moritz (2009). The End of Chimerica. HBS Working Paper 10-037. Retrieved from: http://www.hbs.edu/faculty/Publication%20Files/10-037.pdf
  2. Sanyal, Sanjeev (2014, October 15). The Wide Angle: The Age of Chinese Capital. Deustsche Bank Research. Retrieved from: http://etf.deutscheawm.com/AUT/DEU/Download/Research-Global/c6762d18-6b36-4911-9a0a-c2f08a899705/The-Wide-Angle.pdf
  3. Simberloff, Daniel (2014, October 7). The “Balance of Nature”—Evolution of a Panchreston. PLOS-Biology. Retrieved from: http://www.plosbiology.org/article/fetchObject.action?uri=info:doi/10.1371/journal.pbio.1001963&representation=PDF
  4. Zemrun, Josh and Cui, Carolyn (2015, April 24). Glut of Capital and Labor Challenge Policy Makers. Wall Street Journal. Retrieved from: http://www.wsj.com/articles/global-glut-challenges-policy-makers-1429867807