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World economic recovery driven by global imbalances

At first glance, Americans seem to be cutting back on their debts. Total household debt has fallen 2.7 percent, or $374 billion, since peaking in the second quarter of 2008. But, as the Wall Street Journal recently noted, U.S. banks and lenders have written off almost exactly the same amount of loans as unrecoverable. That means, on balance, that Americans are not paying down what they owe in any meaningful way.

The broadest measure of the gap between savings and consumption, known as the current account deficit, was about 5 percent of total economic output before the crisis in 2007. It shrank to 2.9 percent last year as U.S. consumers cut back and saved more. But based on current trends, the International Monetary Fund now expects that measure to climb back to 3.3 percent this year and to 3.6 percent in 2013.

China's current account surplus, by contrast, fell from 11 percent in 2007 to 5.8 percent last year. But as the Chinese return to their high-saving ways, this surplus of income over spending is forecast to rise to 8 percent in 2015.

In the United States, policies to deal with the economic crisis have contributed to the trend: deficit spending on government stimulus programs, incentives to buy automobiles and various subsidies for borrowing money to buy a house. China, meanwhile, is continuing to encourage its exports by keeping its currency cheap, though Beijing said last month that it could allow a gradual adjustment of the value.

This problem of global imbalances was high on the agenda when leaders from the world's 20 largest economies met late last month in Toronto. But their joint statement dealt with the issue only in vague terms, promising to seek "strong, sustainable and balanced growth." There was no specific agreement on how governments would do this.

The recent financial tremors in Europe could aggravate the imbalances further. Some European countries have responded to the debt crisis by slashing government spending and reducing consumption. Germany, the continent's largest economy, was already producing more than it consumed, and its move toward austerity could reduce demand for American products just as the United States is pushing to expand exports.

World leaders trying to grapple with these issues face a clash between what is best for the world economy in the long run and the immediate interests of their respective countries. The risk: that the seeds of the next crisis are already in the ground.

"These imbalances weren't accidental," said Robert Shapiro, chairman of the economic advisory firm Sonecon and head of the globalization initiative at think tank NDN. "They solved large political and economic problems for a lot of countries and were the result of successful political arrangements. That's why they're so hard to untangle."

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