Abstract: In this paper, we put forward the Money Dilution Theory (MDT) based on analysis of the traditional monetary theories of CIU, CIA and OLG. MDT reveals that the most essential feature of paper money is a dilution or division to the output value which is value source of paper money. We build a general equilibrium model about excess liquidity and the global imbalances based on MDT and conclude: (1) each country has the motivation to reduce its interest rate that causes pressure of low global interest rate. (2) China with high savings, high growth and low financial development and US with high consumption, low growth and high financial development form economic dual relationship, which causes deficit in US current account. (3) Because of the effects of the world economic status and the international reserve currency status of US, the capital in China flows more to US so that there is an increasing proportion of US asset in the world portfolio and so-called “Greenspan’s Conundrum” is formed. (4) The United States has chosen operational financial tools to control the world economy so that we cannot exclude that US current-account deficit is the result of the US carefully planning.
Keywords: Excess Liquidity, Global Imbalances, Money Dilution Theory (MDT), Comprehensive Analysis
source:Finance & Trade Economics ,No.6,2014