We Can’t Keep Living Like This

Imbalanced Global Growth

Global external imbalances have been a major focus for us over the last year or so, for instance here, here, here, and here.

It would be easy to say that this is because President Trump made global trade the focus with tariffs. However, this is only half the truth given that focussing on the global imbalances is so mainstream that the IMF writes articles about it, while this topic is the longstanding mainstay of very well known economists such as Brad Setser and Michael Pettis. Meanwhile, the implications of unbalanced global growth are not just felt in the US, with the EU even effectively monitoring its impacts on a monthly basis.

The idea that large global external imbalances are building and creating global risks is actually a smack bang consensus one. However, policy has clearly been quite skew whiff with regard to addressing the fundamental issues, and that probably is because the underlying drivers are not so intuitive. It makes sense to spend some time laying these out.

The reason politicians and the public miss the point is that in order to consider trade balances between countries, we must consider each country’s domestic economy. This might go against instincts to think along the lines that “we are talking about global trade so we should look at global trade”.

However, if we think about things little differently, this makes more sense. For instance, why might a country in aggregate import goods and services? Well because its domestic demand for goods and services is greater than its ability to produce goods and services. These imports will be serviced by another country, which exports the good. If that second country is in aggregate exporting, that means that domestic consumption of its products is running below its ability to produce, because demand has been supressed below this level for whatever reason. So external imbalances are driven by domestic goings on.

Mathematically (nerd!), we have a series of equations that tells us how a country’s domestic economy relates to its external sector.

We know that all of the income in an economy (gross national income) is equal to domestic production plus investment (primary income) and conciliatory (secondary income) flows from abroad:

GNI = GDP + primary income balance + secondary income balance

Substituting in our GDP by expenditure breakdown (GDP = consumption + investment + net exports) into our GNI equation we find:

GNI = Consumption + investment + net exports + primary income balance + secondary income balance

But we also know that the last three terms here just equal the current account balance, i.e. current account balance = net exports + primary income balance + secondary income balance. So subbing this in we find:

GNI = Consumption + investment + current account balance

Rearranging gives:

Current account balance = GNI – consumption - investment

Finally, we know that income (GNI) can either be consumed or saved, so savings = GNI – consumption. Subbing this in we find:

Current account balance = savings - investment

Easy.

This shows us that a country’s current account balance is actually driven by domestic savings and investment decisions. If the macro backdrop is favourable to savings (e.g. an aging population, consumption taxes, favourable investment taxes, rising incomes) relative to investment, then the current account balance will rise. If the macro backdrop is favourable to investment (e.g. low interest rates, government capital investment, major secular trends in infrastructure build out) relative to savings, then the current account balance will fall.

This is quite easy to interpret in a country’s GDP figures. If consumption is very high relative to the size of the economy - as it is in the US - then savings will be lower, meaning the economy can only support a modest amount of investment before pushing into a current account deficit. If consumption is very low relative to the size of the economy - as it is in China - then savings will be higher, meaning the economy can support a large amount of investment before pushing into a current account surplus.

In this arrangement, with free movement of goods and capital, domestic investment needs are not completely determined by domestic savings availability. The US doesn’t stop investing when its capital allocation hits a savings ceiling. Similarly, the excess savings in China do not sit idly. Chinese savings move to finance the US savings deficit, facilitating greater investment than the domestic US economy can facilitate.

Beautiful stuff, at least for now.

The problem with this arrangement is that those savings are not freebies, they must be paid back in the future. Whenever Chinese savings are transferred to the US, China gains a financial claim on the US. This needs to be paid back at some point, and it would not make sense for China to keep stacking these claims up should it reach the point where the US might become a bad debtor.

Will the US reach that point?

With our economic relationships, we can quite easily plot out how the next few decades would look assuming that both countries maintain the same economic growth models. This is the status quo as of mid-2026. China has not really moved to shore up consumption and policy continues to favour saving. The US continues to conduct very pro-consumption policy with low taxes, and even the fiscal tightening from tariffs was offset by big, beautiful bill easing (the only way the tariffs work into our framework would be by depressing domestic consumption, which the BBB offsets). Meanwhile, the US is amid an AI boom, which pushes up domestic investment even further.

Assuming that growth rates for each component of GDP evolve over the next 25 years in line with their 10 year averages for both the US (to 2025) and China (to 2024), we find that China will continue to run a substantial current account surplus, while the US’s large current account deficit gradually expands:

Every year of external imbalance is another year that China’s financial claims on the US rise. That means that China’s net international investment position will gradually to push into an even larger surplus, while the US’ will push into a larger deficit. Assuming no revaluation effects, we plot the NIIP balances until 2050 for both markets below:

Some big and growing imbalances there.

As we said in the title, we can’t keep living like this. The US must consume less (which from a policy point of view translates most easily to the US needing to consolidate its fiscal deficit) while China must consume more. Otherwise, China will have such significant financial claims on the US that the US may struggle to pay them back.

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This newsletter is for informational purposes only. It does not constitute investment advice or an offer to invest. The views expressed herein are the opinions of JB Macro exclusively. Readers should conduct their own research and consult with professional advisors before making any investment decisions.