Review - Book Report/Review Example

This cannot sustain for long. The first chapter of this book details about capital flow and trade imbalances, during the past couple of decades that is responsible for the current global financial crisis. Second chapter discusses about the trade intervention methods adopted by countries in terms of devaluating their currencies and imposing import tariffs. Pettis opines that these acts ultimately result in trade imbalances. Third chapter discusses about the forms of trade interventions by any form of tax shift, which can disturb the relationship among factors like total production, consumption and investment.

Pointing to trade surplus and success-driven model of Chinese economy, author argues in fourth chapter that this is actually due to unsuccessful domestic policies, which allowed savings rate to go above the investment rate. Fifth chapter discusses about the effect of such imbalance in one country due to the savings and investment gap, on other countries. Citing competition within European countries to be responsible for European financial crisis, Pettis has offered three resolutions to this problem, in the sixth chapter.

In the next chapter, the author discusses about the “currency wars”, when different countries try to export their surplus savings to one-another. In next chapter, author argues that US dollar is a dominant reserve currency, which other countries like to acquire for seeking major share of global demand. The author argues in chapter nine that the global crisis can end only if the trade and capital imbalances, as explained in previous chapters, are reversed. Opinions about the book In other words, Professor of Finance at Beijing University, Michael Pettis has started a war between bulls and bears.

While bulls believe that China has at least one more decade ahead for growth, the bears forecast sharp decline in economic growth, due to these imbalances, in coming few years. This paper will try to examine the arguments put forward by Pettis in his book, analyzing a China Real-time Report. (eight questions) What about China’s high saving rate High savings rate in China may be due to conservative households. However, Pettis rightly argues that savings rate is dependant on few factors. If the GDP share, within the household income is higher, then the saving rates are lower.

The inequality in income results in more savings. Financing with credit willingly by institutions, based on assumptions of future income generation affects the saving rate directly. Policy change that affects any of these factors will directly affect savings rate. China-US trade relationship Author correctly argues that balance of payments between the two countries must balance. For that to happen, it is important that savings and investments balance globally. However, China, having savings rate higher than its already huge investment rate has created the imbalances for world trade.

Causes of financial crisis Author argues that the financial crisis is the outcome of balance sheet defaults. The trade account and capital account settings are related to each other. As the saving ratings change, due to domestic disturbing factors, its impact on trade account has a matching opposite impact on the capital account. Such imbalances create national balance sheet problems. Is the problem resolved? Many economists think that downsizing of China’