Carnegie Endowment for International Peace
Pettis, an expert on China’s economy, is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.
Michael Pettis is a nonresident senior fellow in the Carnegie–Tsinghua Center for Global Policy. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.
From 2002 to 2004, he also taught at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs.
Pettis worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the sovereign debt trading team at Manufacturers Hanover (now JPMorgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was managing director principal heading the Latin American capital markets and the liability management groups. He has also worked as a partner in a merchant-banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team.
In addition to trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
He formerly served as a member of the Board of Directors of ABC-CA Fund Management Company, a Sino–French joint venture based in Shanghai. He is the author of several books, including The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy (Princeton University Press, 2013).
The impact of Evergrande has caused financial distress to spread faster and more forcefully than Beijing’s financial regulators expected, putting pressure on them to move quickly to stop the contagion. But they cannot rescue Evergrande’s creditors without also undermining their fight against bad debt.
The bezzle, a word coined in the 1950s by a Canadian-American economist, is the temporary gap between the perceived value of a portfolio of assets and its long-term economic value. Economies at times systematically create bezzle, unleashing substantial economic consequences that economists have rarely understood or discussed.
A recent study on U.S.-China trade concludes that Trump’s trade policies cost the U.S. economy nearly a quarter million jobs. But its obsolete understanding of trade flows ends up pointing trade policymakers in the wrong direction.
The idea that trade imbalances are more likely to be the result of credit imbalances than of savings imbalances ignores the role of savings imbalances in creating credit imbalances. When a surplus country demands to be paid for its trade surplus with claims on American assets, the U.S. economy must adjust to create these assets—and one of the most common ways it does so is by expanding credit.
It is easy to assume that sovereign debt forgiveness involves a collective transfer of wealth from the creditor country to the debt-owing country, but this is only true under specific—and unrealistic—conditions. In today’s environment, sovereign debt forgiveness mainly represents a transfer within the creditor country. It benefits farmers and manufacturers in the creditor country at the expense of the country’s nonproductive savers.
There is a widespread belief that a country’s national debt burden is sustainable if the interest rate on its debt is less than its expected GDP growth rate. But, in fact, the relationship between interest rates and the GDP growth rate reveals more about the distribution of income in a country than about the sustainability of its debt.
It is a mistake to assume that there is a global capital and technology frontier toward which every country must strive to acquire development. Economic development requires, above all, the right set of formal and informal institutions.
U.S. households will likely respond to the shocks of the pandemic by increasing their savings rates, as will foreign households. If the U.S. government does not decisively increase spending, higher American household savings will force either American debt or unemployment to rise even more.
The debate about whether it is U.S. consumers or Chinese businesses that pay for American tariffs on Chinese-produced goods reveals absolutely nothing about whether the tariffs harm or benefit the U.S. economy.
There are conditions under which governments can create money—or debt—without fear of inflation or excessive debt burdens. There are other conditions under which debt or money creation can lead to inflation and balance sheet problems.
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