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Who can rev up the world economy?

Frank van den Bergh | E+ | Getty Images

The best candidates to do that are countries running (a) external surpluses, (b) low budget deficits (or balanced public sector accounts) and (c) inflation rates approximating price stability.

You may be surprised to learn that these are not the proverbial "rare pearls." Countries currently meeting these criteria represent more than 40 percent of the world economy. They are now showing a combined current account surplus of $1.1 trillion.

In other words -- and to put it mildly to infuriate Donald Trump – nearly half of the world economy is living off the other half.

How are they doing on public finances? Japan is the only outlier in this group, but all the others are in the range of small surpluses (Germany and South Korea) to a projected deficit of 2.7 percent of GDP (China).

Their inflation record is the most glaring signal that they need to boost the growth of internal demand, instead of relying on excessive trade surpluses that are destabilizing the world economy. With an inflation rate of 2 percent, China is the only country in this group showing vigor in its domestic GDP components. The German-led euro area, Japan and South Korea have virtually no consumer price increases, while some smaller East Asian economies (usually labeled – get the misnomer -- as the "dynamic Asian economies") are showing a significant price deflation.

Stop whining, call them out

Looking at this enormous pool of unused (physical) capital and labor resources, it is puzzling to see all the hand-wringing and resignation on the part of people who are lavishly paid by the taxpayers' money to coordinate global economic policies in order to produce a stronger and a more balanced world economy.

It's the same thing at the national level. The frontrunner for the nomination of the Democratic Party in U.S. elections is saying nothing about the economic policy, but is making a heroic promise to stamp out the future financial crises. That is easy. We already have all the regulations in place and federal agencies perfectly capable of enforcing them. There is no need for more red tape and financial market cops.

By contrast, the candidate leading the Republican Party opinion polls (Donald Trump) has repeatedly warned about the trade surplus free-riders. Sadly, his call is barely registering on the primaries' scale. And, in spite of his continuing public support, he still has to convince the political establishment that he will have the staying power in the long and grinding election process.

Europe is even worse. Its two key leaders, the German chancellor and the French president were invited last week to tell the European Parliament what they were going to do to stabilize the EU economies and the area's increasingly chaotic political scene. They said nothing; both delivered remarkably vacuous speeches. The French president was also rudely insulted by the leader of the right-wing party expected to win big in December's regional elections. The German Chancellor Merkel is not doing well either. Her approval ratings are falling, and her refugee policy is threatened with a constitutional challenge from a very powerful prime minister of Bavaria, the head of her twin party. Smelling blood, her coalition partners, who are also members of the government, are joining a widening attack on her disastrous handling of the refugee crisis.

That is the state of play in Europe -- nearly one-fifth of the world economy -- where Germany should lead the continent out of its mass-unemployment (23 million people) and economic stagnation.

Growth, not trade surpluses

With a current account surplus now running at an annual rate of $280 billion (a whopping 8 percent of GDP), a small budget surplus and price deflation, Germany should be duty-bound to stimulate its domestic spending in order to speed up the euro area recovery and to contribute to faster economic growth in the rest of the world.

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Don't count on that. As Europe's unchallenged boss, Germany is, in effect, saying: Hey, don't look at me. Look at China's slowing economy. It's all China's fault.

That seems to be working. Perversely, the onus is on an economy that is growing at a rate of 7 percent in a stable and sustainable manner. In fact, an economy that Germany clings on to in order to beef up its export sales. And they may well do it.

During China's "Golden Week" national holiday (October 1-7), retail outlets rang up sales of 1.1 trillion yuan, an 11 percent increase from the year earlier. Some large consumer outlets are registering doubling and tripling sales volumes compared to last year. And this is no longer just a story of China's urban middle class (estimated at nearly 400 million people). The Nielsen consumer research company is reporting that the online shopping by China's rural dwellers soared 64 percent in the second quarter of this year – markedly above the national average of 53 percent.

There is, therefore, little doubt that China will deliver on its growth target (7 percent), and that its household consumption and infrastructure investments will be the main drivers of economic activity in the months ahead. A strong impulse to growth will also come as China continues to implement its huge Silk Road Economic Belt projects.

By contrast, Japan – another large surplus country -- is struggling with serious structural problems it is trying to circumvent with an expansionary monetary policy, cheap yen and growing exports. That policy holds no promise for any net contribution to global growth. The best Tokyo could do is to open up its economy so that the rest of the world could sell something on Japanese markets.

The rest of East Asia should be able to do better than that. The region's smaller economies with large external surpluses, roughly balanced public sector accounts and low inflation should not keep complaining about the alleged damage the Fed would do to their economies by initiating its long-overdue interest rate increases. They have plenty of room to keep their economies growing by stimulating their domestic expenditures.

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Investment thoughts

The world leaders will soon have an opportunity to tackle these huge trade imbalances and to set the stage for a faster and more sustainable growth of global trade flows. They are scheduled to meet for an annual G20 (the world's main economic forum) event in Antalya, Turkey on November 14-15, 2015.

But don't hold your breath for anything that would help growth and employment. The focus will again be on intractable Middle East wars, Ukrainian tragedy and East Asian territorial disputes.

If you are inclined to worry about the Fed, don't. At the moment, there is nothing to indicate that the Fed is preparing an increase of its money market rates, despite solid growth we can expect in the months ahead. Subdued inflation will hold the Fed's hand.

That is foreshadowed by a 0.6 percent increase in U.S. unit labor costs during the first half of this year. And that, of course, bodes well for corporate profits in a growing economy. The U.S. equity markets are not a spent force some perennial naysayers would want you to believe.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.