Foreword 3

1 Introduction 7

2 Global imbalance basics 10

2.1 Back to basics 10

2.2 Some lessons from history: financial crisis risks 12

3 Why now? 16

3.1 A similar geography of imbalances, but with sharply increasing US net liabilities 16

3.2 A different narrative: industrial policy and import competition from China 21

4 Optimal adjustment: all together 28

4.1 Adjustment in the United States: it's mainly fiscal 29

4.2 Adjustment in Europe: invest and reform 30

4.3 Adjustment in China: rebalance 34

5 Contingent policy adjustment 41

5.1 What if the US does not adjust? 41

5.2 What if the European Union fails to raise investment? 47

5.3 What if China does not rebalance? 48

6 Conclusion 55

References 57