They take no account of a host of other factors that may defuse pressures on imbalances, including adjustments in real exchange rates, lower investment ratios as the marginal product of capital reduces in emerging markets and falls in saving rates in emerging markets as the social safety net is widened and deepened. These offsetting factors will need to be very significant, however, if they are to counterbalance medium-term upward pressures on global imbalances from demographics and convergence. Conclusion So where does this leave us? With a potentially dramatic change in the future international financial landscape. With a potentially decisive shift in the pattern of global capital flows. With potential pressures for a further widening in global imbalances. And, if so, with a likely intensification of pressures on international monetary, financial and trading systems. The impetus to reform these global systems is strong today. It may be stronger still tomorrow. BIS Review 174/2010  13  References Barro, R J (1991), “Economic Growth in a Cross Section of Countries”, The Quarterly Journal of Economics, 106(2), pp 407–443. Bayoumi, T, Tong, H and S-J Wei (2010), “The Chinese Corporate Savings Puzzle: A Firm Level Cross-country Perspective” NBER Working Paper, No. 16432. Bernanke, B (2010), “Monetary Policy and the Housing Bubble”, Speech at the Annual Meeting of the American Economic Association, Atlanta, Georgia. Black, F (1976), “The Dividend Puzzle”, Journal of Portfolio Management, 2(2), pp 5–8. Blanchard, O and G M Milesi-Feretti (2009), “Global Imbalances: In Midstream?”, IMF Staff Position Note 09/29.

Andrew G Haldane: Global imbalances in retrospect and prospect Speech by Mr Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Global Financial Forum, Chatham House Conference on “The New Global Economic Order”, London, 3 November 2010. *  *  *  I am grateful to Charlie Bean, Martin Brooke, Oliver Bush, Richard Davies, Katie Farrant, Samuel Knott, William Speller, Gregory Thwaites, Iain de Weymarn, Tomasz Wieladek, Michelle Wright and Gabriele Zinna for comments and contributions. Global imbalances are colossal. At their high-water mark in 2006, imbalances of the G7 economies totalled around 5% of GDP. Like Colossus, global imbalances straddle many of today’s most important global public policy issues. These include the architecture of the international monetary system, the future of the international trading system and the design of the international financial system. These are high stakes. This paper assembles some facts from the past on global imbalances. More speculatively, it also assesses some of the factors shaping the course of imbalances in the future. Those medium-term forces suggest that imbalances may get worse before they get better. If so, this global financial fault-line could cause further tremors to the international monetary, trading and financial system in the period ahead, the like of which we are currently experiencing. Global imbalances – past Global imbalances are a natural by-product of free trade in goods, services and capital. In others words, capital flows are a necessary ingredient of trade and capital liberalisation. In that sense, they are good cholesterol.