Here are the three largest current account deficits in the world; the US, Spain and the UK. Taken together, over the last 12 months, these three countries have imported $972 billion more than they have exported.
The numbers in white represent the current account deficits of each country in percent of GDP. The deficits in the UK and the US are certainly large, but the Spanish deficit is just shocking. Currently, it stands at 9.5 percent of GDP. No country can accumulate deficits of that magnitude without risking a major crisis.
If these economies are running up huge deficits, there must be other countries running up huge surpluses. Here are the countries with the five largest external surpluses.
Three of the top five are manufacturers, while the remaining two are oil producers. At least two of the three manufacturers - Japan and Germany - are not low wage economies, dispelling the myth that cheap labour is the essential requirement for maintaining a vibrant industrial base.
Comparing the deficit countries with the surplus ones produces an extraordinary observation. The combined deficit of the big three is almost the same order of magnitude of the big five surplus countries. Is that a statistical fluke, or is there something quite fundamental going on here?
There is nothing random about this observation. The big five surplus countries are selling huge amounts of goods and services to the deficit countries, who pay for these goods in cash. The surplus countries return this cash back to the big three deficit countries by either extending loans to deficit country governments and firms; depositing the money in deficit country banks, or buying assets in deficit countries. The deficit countries then use this recycled cash to buy ever more imports.
Let us illustrate this monetary recycling with some real world examples. It could be the Chinese government buying a US treasury bill, a Russian oligarch buying a house in Chelsea or a German factory manager depositing money in a Spanish Bank. However, the key takeaway from this process is that behind this circle lies a mountain of debt and asset transfers.
As any pawn broker will tell you, spending beyond your means through borrowing or selling your possessions is not something that can go on forever. Sooner or later, you have to stop spending and start paying back.
I think that point is now very close for the big three spenders.