Systemic Debt Crises in International Disequilibrium System

Hema Senanayake,Kumar David,W Wimalaratana

doi:10.4038/sljer.v7i2.117

Abstract

Global Savings Glut (GSG) hypothesis has become the predominant and official theory attempted to explain the global financial crisis of 2008 and the Great Recession of 2008 – 2009. “… it is impossible to understand this crisis without reference to the global imbalances” (Bernanke, 2009). Any possible “global imbalance” must be connected to the international terms of trade and international exchange rate mechanism. GSG theory argues that the overwhelming credit (debt) growth occurred in the U.S. prior 2008, was due to savings made by certain trading partners, which resulted for the U.S. to have a persistent Current Account deficit and prevented the ability to increase interest rates by the U.S. monetary authorities to reduce current account deficit, as significant capital inflows from those countries took place. Yet, the paper observes that debt crises take place in countries where there are Current Account surpluses. This conundrum needs to be examined. Hence, the paper finds that another empirically verifiable proposition could possibly be used to explain the systemic debt crises better.

Highlights

The objective of this paper is to examine systemic debt crises in International Disequilibrium System which disequilibrium is typified by the disequilibrium in terms of trade
The key words were used to make an enhanced search to track key journal papers written on the international disequilibrium system
This paper argued to do away with fixed exchange rate mechanism established under Bretton Woods Agreement of 1944 and it was done in 1971 by implementing a flexible exchange rate mechanism to eliminate terms of trade disequilibrium that the U.S had with Europe

Summary

Introduction

The objective of this paper is to examine systemic debt crises in International Disequilibrium System which disequilibrium is typified by the disequilibrium in terms of trade This disequilibrium has led to have “savings glut” in certain countries like China, South Korea, Japan, Saudi Arabia, etc. The mentioned global savings glut was identified as the main cause to create a severe unsustainable debt bubble prior to the Great Financial Crash of 2008 in the United States and European Union. This proposition was hypothesized as “Global Savings Glut Hypothesis” by a former Federal Reserve chairman, namely, Ben S. The objective of this paper is to examine this conundrum

Objectives

Methods

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Conclusion