A View on Global Imbalances and their Contribution to the Financial Crisis

The Global Imbalances that contributed to the financial crisis (2007-2010) are still present, and the world still hasn’t fully recovered from recession. There is no consistent explanation of the Global Imbalances and their interaction with simultaneous events yet. The current state of the literature is that papers contradict each other and the main questions remain unsolved. This paper aims to provide a coherent story of the economic environment that laid the ground for the financial crisis, focusing on the evolution of Global Imbalances. It will reconcile the discrepancies of the different strands of existing literature and hypotheses. Hypotheses which can be rejected will be discarded. The paper will try to explain what mechanisms (inside and outside of the US) worked within these Imbalances, how they were motivated and if these mechanisms are sustainable. The single most important result will be that there is no obvious reason why China and the other emerging Asian economies finance the US. Further, the US finance themselves by means that are not fully understood yet and can only partially be explained. One important factor appears to be the use of the Exorbitant Privilege via Seigniorage. Other factors remain unknown.