I have been greatly inspired by economist Michael Pettis, who blogs here. His work on the causes of the Great Recession, the eurozone crisis and, especially, Chinese development, seems to me to be both original and revelatory. In what follows I will outline the basic elements of his insightful theory of the global economy.
Pettis’ work draws on the ideas of Keynes, Minsky and many others, and incorporates lessons from economic history and political economy, which makes its scope broad and widely applicable.
At the heart of his theory are some accounting identities which are basic to international macroeconomics.
To begin with, for any economy, the current account surplus is equal to the excess of domestic savings over domestic investment. To put it another way, net domestic savings (gross savings minus gross investment, whether private or public) is equal to foreign borrowing, or domestic lending abroad. Continue reading