its intervention in the currency or in interest rates and credit. In that case we would be in a beggar-thy-neighbor world, and in that world global unemployment always rises.

So the problem is not lack of capital but rather that Berlin does not want to take on Spanish risk, mainly because it believes that the chances of a Spanish default are too high, and that guaranteeing Spanish obligations would undermine German’s own creditworthiness. What Berlin really wants is for someone else to lend to Spain and so take on the

In a globalized world, in other words, savings and investment rates are not set wholly or in some cases even primarily by domestic cultural preferences or by domestic policies. They are heavily affected by foreign policies through the trade account.

Thanks to Europe’s monetary policies driven by the needs of Germany—a strong euro and low interest rates—the deficits showed up primarily in peripheral Europe. Before the creation of the euro, Italy, Spain, France, Greece, and Portugal had occasionally run fairly large trade deficits—in total they show up among the top ten deficit countries

the game stopped. The key point here is that all other things being equal, rising income inequality forces up the savings rate. The reason for this is pretty well understood: rich people consume a smaller share of their income than do the poor.

The first is our best-case scenario, although for the reasons I have noted it is unlikely to describe conditions today, especially in capital-rich countries like the U.S. The second and third ways are unsustainable because they actually destroy value by increasing debt faster than they increase debt-servicing capacity.

We fail to think in terms of the overall system.

The first is to assume that any nominal increase in the value of the currency is equal to a real increase. It isn’t. Since 2005 productivity has grown faster in China than in the United States, so the renminbi would have to rise by that differential—several percent annually—just to maintain its real relative value.

The difference between posted GDP growth rates and real increases in wealth shows up as excess debt. Eventually the imbalances this misallocation creates have to be resolved, and the wealth destruction has to be recognized as debt levels are paid down.