Imbalance PNG Transparent Images

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Submitted by on Mar 8, 2020

Global imbalances refer to a situation in which some countries have more assets than other countries. Theoretically, when the current account is in balance, it has zero value: capital inflows and outflows will be mutually canceled. Therefore, if the current account constantly shows a deficit for a certain period, it is said to indicate an imbalance. Since, by definition, all current accounts and net foreign assets of countries of the world should become equal to zero, other countries begin to indebted to other countries. In recent years, global imbalance has become a problem in the rest of the world. The United States has a long-term deficit, like many other advanced economies, while the opposite is true in Asia and emerging economies.

Compared to previous global imbalances, the current period has unprecedented characteristics. For the first time, capital flows flow mainly from emerging market economies (mainly from Asia and oil exporting countries) to advanced economies. In addition, the position of foreign assets has become much larger both in gross and in net terms, and the degree of capital mobility is the highest in recent decades. Therefore, the magnitude of these imbalances is comparable only with the period before the First World War.

In addition, the conditions under which they arose are different. The new entrants, who were previously on the periphery of world trade and finance, have become an important part of international markets after the process of economic liberalization, lower transportation costs, information technology and deepening financial markets and global commodity chains.

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Financial ties between economies have also increased. Macroeconomic and financial conditions improved, especially in 2003-2007, with record economic growth and low volatility in the financial markets. As will be explained later, these are important factors contributing to increased globalization in financial markets.

The global imbalance helped fuel the financial crisis, although it did not. An overabundance of savings helped reduce bond yields through overseas purchases. This decrease in interest rates, in addition to other policies adopted by central banks, stimulates risk taking and risk underestimation on the verge of financial innovation, which can also be stimulated by this financial environment. It also helped increase leverage in advanced economies and create a housing bubble in many of them through relaxed lending conditions.

In addition, the growth of financial ties leads to a rapid spread in the economy. It is easy to argue that the economic policies pursued by emerging markets have led the developed economy to be able to borrow money cheaply abroad and finance bubbles in the housing and financial markets.

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