‘GLOBAL IMBALANCES’ AND THE WORLD ECONOMIC CRISIS: A CRITICAL APPRAISAL GERMAN FELDMAN 1 Abstract The aim of this paper is to examine the validity of one the most widespread explanations for the current economic crisis, the one that emphasizes the disruptive effects of ‘Global Imbalances’. The conventional wisdom, probably based on the traditional Hume’s ‘Price-Monetary Flux’ mechanism, was that sooner or later, the U.S. external deficit would lead to an explosive debt dynamics and thereby, foreign investors would stop buying American assets. Consequently, the adjustment process required to restore equilibrium would imply a depreciation of the dollar and a reduction of consumption and investment in the United States. However, the current economic crisis has shown us that once again “reality does not behave as the orthodox model predicted”. While neoclassical economists expected a crisis characterized by a fall in the dollar, a loosening of China’s peg to the dollar, a rise in the currencies of key emerging economies and higher interest rates on the U.S. governments borrowing, the recent macroeconomic episode has been defined by a rise in the dollar –at least in its first phase-, a tightening of China’s peg, a sharp fall in emerging market currencies and a fall in the U.S. governments borrowing costs. In this regard, we attempt to show that Global Imbalances should not be blame for the crisis. From a Keynesian point of view, the U.S. current account deficit is not unsustainable per se. The United States enjoys the degrees of freedom associated with the fact that the dollar is considered nowadays the “world money”. Moreover, if investment determines saving and not the other way around, as Keynes pointed out, then the U.S. current account deficit provides a source of effective demand for emerging economies and thus, promotes global production and employment. JEL Classification: E44 – F41 Key words : Global Imbalances - floating dollar standard - Surplus Approach - financial fragility - 1 University of Buenos Aires and National Council of Scientific and Technical Research of Argentina (CONICET). E-mail address: feldmangerman@gmail.com 1