Unlearned Lessons


HONG KONG — Wall Street has been bouncing this way and that as hopes about the U.S. economy alternate with fears. But viewed from a relatively thriving East Asia two issues threaten to expose the shallow foundations of global recovery. One is the resurgence of current account deficits in the West that have been a root cause of financial instability. The other is that old enemy, inflation, as interest rates are held at levels well below price rises even in most of buoyant Asia.

From the perspective of the creditor half of the world, the U.S. recession has not resolved some of the fundamental imbalances which caused the crisis. The U.S. financial sector may be partly restored to health and the real estate market half adjusted to its long term trend. But the deficit in the current account of the balance of payments — the sum of exports and imports of goods, services, transfers and income payments — is already heading back toward levels which cast doubt on America's ability to stabilize foreign liabilities, now totaling $2.7 trillion.

The current account deficit fell from a peak of $856 billion, or 6 percent of gross domestic product, in 2006 to 3 percent in 2009, but now the deficit is already back at 4 percent of G.D.P. and rising. A continuation of the U.S. recovery without significant change in other factors will return us to the situation five years before the crisis erupted in 2008, when the current account deficit averaged an unsustainable 5 percent of G.D.P.

Domestic demand in the developing world should generate more U.S. exports and more profits for American companies overseas. But that gain is likely to be offset by increases in imports as commodity prices stay robust and inflation in Asia raises manufacturing costs. Renewed recession, or major currency realignments or protectionism or a massive drop in oil prices — or a combination of these factors — are the only ways for the United States to stabilize its foreign liabilities.

Meanwhile the big bounce in Asian economies looks likely to fade as the current export rebound and fiscal stimulus programs come to an end. China may still appear strong, but much of its growth is the result of over-investment in buildings and infrastructure more than in consumption.

In the United States fears of deflation linger but most of Asia, except Japan, has the opposite concerns. Consumer price rises of 3 percent or more have become the norm. Chinese consumer prices are officially at a 3.5 percent annual rate, but this is widely assumed to be an underestimate. India is close to double digits and South Korea has raised its forecast to 3 percent. Some of this may be from a one-off rise in food prices, but underlying it are pressures for hikes in wages, commodity prices and interest rates. It is difficult to believe that the United States, which benefited in the previous decade from falling prices of Asian goods, can now escape the impact of Asian inflation.

Zero growth in U.S. imports is needed to bring the current deficit down to a sustainable 1 to 2 percent of G.D.P. For that to happen, Asia will have to make major adjustments. But there is now a danger that fiscal stimulus in much of Asia is wearing off or being diverted from consumption and productive investment into real estate bubbles. G.D.P. estimates for 2010 are still being revised upward, but the 2011 outlook is less rosy.

As for the value of the Chinese yuan, the currency liberalization announced by Beijing in June has led to some daily fluctuation but scant sustained rise. Meanwhile Asian trade surpluses are bouncing back to levels incompatible with global financial stability.

The United States has yet to complete the adjustments needed to offset its pre-crisis profligacy. East Asia has yet to recognize that the era of growth via external demand and weak currencies is over. The U.S. recession has not been deep enough to induce sufficient change in either American or Asian mindsets. Cheap money and undervalued currencies are the problem, not the solution.