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3.9 out of 5 stars7
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on 4 October 2013
Get out the bad stuff first. It is pedantic, and goes over the same examples numerous times which maybe painful for the unmuddled mind. But keeping the signs straight as lowering trading deficit is equal to raising the trade surplus; this requires repetition for the layman who is the intended audience.

The good stuff. He clearly exposes how currency manipulation, trade tariffs, labor laws, consumptive taxes and Central bank rates all distort the saving/investment rate in each various countries. This is best part of the book, and provides and abstract framework for understanding these distortions. Forget the moralizing of frugal and spendthrift cultures, he makes a very compelling case the government policy is the primary driver of macro trade imbalances.

Contrary to some other criticism of Pettis, he does not claim the trade imbalances cause financial crises, in fact he constantly says how imbalances can persist for long periods of time. However after a financial crisis, the trade imbalance can determine the pain and suffering recovering from the crisis, because the trade imbalance will revert back toward the mean. He has very interesting predictions for German and Japan as surplus nations.

I recommend highly to any independent thinker who wants to grasp the big mscro picture, and avoid the nonsense of most conventional economists.
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on 30 July 2013
Well worth reading.
Makes the usually forgotten point that earth's economy is a closed system.
There cannot be trade surpluses without deficits, and vice versa. Every German should consider and understand this...
Also makes interesting observations about China's lopsided economy.
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on 8 November 2014
A detailed argument that shows the world is going through a critical economic rebalancing partly based on a combination of China having maintained massive – but unsustainable – investment growth through the operation of artificially low cost of capital, and Germany endangering the Euro by favouring its own development at the expense of its neighbours. In addition, there are also problems with stagnation in Japan, unsustainable U.S and European debt, and the commodity boom in Latin America. Formidable globally linked economic problems, although more on the political dimension might have given greater insight into the underlying issues; but that would probably makes their solution even more problematic.
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on 14 April 2013
I greatly enjoyed this book. It takes a dry subject, international trade, and tries to strip it down to its basic accounting essentials. Once this is established, the author then explains the massive imbalances that have developed in the world's economic financial system and why they have occurred. Finally, Prof Pettis goes on to make some fairly gloomy but likely accurate predictions of some of the world's wonder economies like China and Germany.

The style is simple and the book is surprisingly engaging. I also agree with the general thesis Prof Pettis is trying to advance. However, I do have some issues with it.

The first issue I have might be to do with the fact I read this on kindle, but it lacked any basic equations explaining the simple relationship between the major factors. I appreciate Prof Pettis was trying to make the subject more 'accessible' but a couple of basic equations would have perhaps aided various explanations. I hold a post graduate degree in economics so I am familiar with the concepts. I would wonder, however, if this book is as easy to follow for a general reader.

The second issue I have is while it is seductive to reduce big issues just to accounting identities; international trade is more complex than that. Items traded, technological prowess, administrative issues, transportation and financing all have huge importance but are largely brushed over in this book. That said the title of the book is 'The Great Rebalancing' and the focus of the book is very much China's relationship with the rest of the world and Germany's relationship within the Eurozone. So within the context of the title I understand why the author moved swiftly on to deal with his main points but it does leave you very much with the impression everything is really just accounting and manipulating a couple of factor inputs.

All in all, a very good book but I only gave it four stars due to the issues above.
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TOP 1000 REVIEWERon 22 April 2013
To read this book you need some A-Level economics, because the author does not bother to lay it out. Here's the necessary crib:

(1) Y = C + I + G + (X - M)
(2) Ydisposable = S + C
(3) Ydisposable = Y - TAX + TR

(2),(3) => S + C = Y - TAX + TR =>

(4) Y = S + C + TAX - TR

(1),(4) => C + I + G + (X - M) = S + C + TAX -TR =>

(5) (TAX - TR - G) + (S - I) = (X - M)

In plain English, equation (5) says that the budget surplus (tax collected minus transfers minus government spending) plus net savings (savings minus investment) are identically equal to the trade surplus.

It makes sense, of course. Maybe in today's world you should say that the budget deficit plus net dissaving equals the trade deficit, but you get the idea.

You can complicate it a bit more by also including net investment flows, but the above crib is good enough to plough through the book.

There's a reason the author does not have the crib in the margin of every page: he likes to exaggerate. To exaggerate best, he needs to play fast and loose with equation (5). So he states, for example, that a tariff on a necessary good (a good that is imported from abroad but we cannot do without and will not buy any less of after the tariff has been imposed) will AUTOMATICALLY lead to more net exports.

Such a tariff is clearly a tax by another name. Suppose TAX goes up in equation (5). There's more than one ways this can be balanced out:
(i) more government spending G or more transfers TR would do the trick
(ii) savings S could go down, as people who've borne the tax can save less
(iii) fewer goods might be imported to compensate for the tariff
(iv) less capital might be exported

The author axiomatically states that net exports will go up, which corresponds to (iii) and (iv) above but ignores (i) and (ii). It's one of the book's big ideas that a tariff or a currency devaluation does not rely so much on substitution effects as it does on the inevitability of accounting identities. Well, if you cannot explain it in English, if you cannot lay out how the accounting identity comes about, you should not be writing books, frankly.

Regardless, the author knows what he's talking about, and most of the time he gets it right. Especially when he discusses China (comfortably the best chapter and good enough a reason to buy the book) a lot of the alternatives to balance the equation are irrelevant, because the process is managed and choreographed by the Chinese government. And in China the budget surplus / deficit is totally dwarfed by net savings which (as a result) roughly equal net exports. But the inevitability of the conclusions he presents is, quite simply, false. I agree with him a lot more than I disagree. The point is that he is presenting OPINIONS dressed as FACTS.

So do read the book, but arm yourself with the crib. When something seems far-fetched, check.

The other thing I did not enjoy about the book is the idea that Europe will get better only if the Germans become lazy and overpaid like everybody else. If there was only Europe and nowhere else, I'd say "what the heck, that kinda works too, until somebody else decides to get his act together." In a world with 6 billion people, I'm not so sure there's terribly much value in rushing to the lowest common denominator. Besides, our world is increasingly about services, rather than manufacturing.

Overall, the book discusses many important issues and presents a very interesting analysis of what's going on in China. I'm no China expert and I could not possibly comment on whether the analysis is correct, but it's an interesting and plausible perspective. I'm better off for having read the book, but to anybody who decides to buy it I'd recommend that you crib equation (5) above and write it in the margin of every page. Then use it to challenge the author on his most outrageous claims...

Yes, it's true that BUDGET SURPLUS + NET SAVINGS = TRADE SURPLUS, but it does not come about automatically. Economic agents have to make it happen. Maybe nobody told the author his job was to tell us how.
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on 21 December 2014
In this interesting book, Micheal Pettis presents the familiar story of un-balanced world trade, principally between China and the USA and the clone situation in Europe between Northern Europe ( typified in the text by Germany) and Southern Europe (typified by Spain).

In this reviewer's opinion, it is worth buying the book just for the chart on P.209 showing how capital (savings) can be used in a closed world system.

A key point is that an investment has to be able to generate enough return to repay the loan and interest , which seems quite obvious but is all but forgotten in 21st century economics. His table lists a fine collection of economic dead ends such as, investing in factories, inventories and real estate when there is no demand, using credit to finance consumption or using QE to fuel speculative bubbles.

Essentially the only investments where the author finds of any real value are the rare situations such as the US in the19th century or Europe and Japan rebuilding after WW2 where real productive investment opportunities abounded. Without opportunities like these, his table shows that excess production leads to unemployment making a very simple "real"cycle of valid investment and valid divestment.

Apart from this, there does seem to be a problem with issues that probably should be in the book and aren't.

For example, the author emphasizes the "automatic" nature of trade and capital flows as a national accounting identity when the same identities would apply in a much less interesting manner to the case of a fully protectionist world economy. So it seems that he is essentially talking about the predictable imbalances produced by the dominant Neo-Liberal world free market system and he could have gone directly to the point and evaluated Neoliberalism as an economic philosophy (world neo-liberalism = large trade imbalances).

He goes at some length into Chinese over investment validated by capturing export markets. Export production compensates for (relatively) feeble Chinese domestic consumption with its lagging wage growth, undervalued currency and artificially low interest rates. However, he doesn't evaluate other aspects of the "Export Model" that are considered to be important. For example Dani Rodrik in his book, "The Globalization Paradox: Why Global Markets, States, and Democracy Can't Coexist" shows the Chinese government's support for the Export Model with its associated development arguments. Export industries generate higher employment (than importers), they help China climb the technology curve and they allow China to develop new industries based on foreign demand.

The author could perhaps also have shown these factors having a mirror image in the US. The "Import Model" reduces American manufacturing employment, helps the US miss out on new technologies (eg flat screens) and in fact to lose whole industries with their supplier networks. The suggestion seems to be that this is basically OK in return for the benefit of a flood of underpriced imported goods.

Pettis throws a bone to the Positive Economics crowd with his quick dismissal of normative issues in referring to the futility of, ",,,, moralizing about the virtues of thrift and hard work and by making grand statements about the cultural determinants of success", the problem here being that it is difficult to read a book like Joe Studwell's "Asian Godfathers: Money and Power in Hong Kong and South East Asia" without wondering about cultural differences in the divergent economic trajectories of NE Asia and SE Asia. The governments of South Korea and the Philippines work in very different ways. It is also something of a stretch to disregard European cultural issues when comparing the societies of Scandinavia with those of Southern Italy or Greece. Perhaps he could have looked at the evidence that societies go through cycles, so just because Weimar Germany was famously corrupt and decadent in the 1920's doesn't mean that it has to be that way today. Joseph Heath's recent book, "Morality, Competition, and the Firm: The Market Failures Approach to Business Ethics" for example, convincingly shows the need for ethical standards (not just legal requirements) within the firm for economic development.

The author also seems to dodge some efficiency arguments. He presents German savings and overinvestment within a single currency Euro zone as oppressing Spain by underpricing Spanish imports and overpricing Spanish exports (forcing it into deficits), and he suggests that Spain can only find freedom by breaking away from the Euro and devaluing (the Peseta?). This is one way of looking at it, but personal experience of Spanish business for the last 30 years shows that the country has always resolved efficiency problems by devaluing the Peseta with the implicit associated inflation tax on asset holders. Now for the first time in decades, money retains its value and asset and labour costs are painfully adjusting to reality with the average efficiency of Spanish business fast improving.

In fact Spain seems to be gaining competitiveness and efficiency through deleveraging while neo-liberals elsewhere resist deleveraging with massive QE to force the public and industry to make the unsustainable investments as identified on the P.209 chart?
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on 4 September 2015
Very good insight.
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