Conventional wisdom has it that the currency mechanism lies at the heart of the coming rebalancing of the world economy.
With goods imports still more than 70% larger than exports, America's trade imbalance remains very much an outgrowth of a serious excess consumption problem.
I have long argued that global rebalancing cannot occur without a meaningful shift in the mix of global consumption - more specifically, cutbacks in excess US consumption accompanied by increasing consumer demand elsewhere in the world.
By now, global rebalancing has become part of the mainstream thinking on the global economy - a far cry from the initial reception that greeted my first missive on the subject nearly five years ago (see my 21 May 2002 dispatch, "Global Rebalancing").
Conventional wisdom has it that the currency mechanism lies at the heart of the coming rebalancing of the world economy. Leading academics have long argued that it will take at least a 30% decline in the dollar's real effective exchange rate to correct the principal imbalance of an unbalanced world - the record US current account deficit (see, for example, Maurice Obstfeld and Kenneth Rogoff, "The Unsustainable US Current Account Position Revisited," November 2005).
I still don't buy that line of reasoning. The broad trade-weighted dollar index is now off 16% in real terms from its early 2002 highs - slightly more than half the 30% decline that the models deem necessary for rebalancing. Yet, the US current account deficit has barely budged - holding steady at around 6.5% of GDP over the 2005-06
America's gaping current account deficit is an unmistakable outgrowth of an extraordinary deficiency of domestic US saving - a net national saving rate that plunged to a record low of just 2% of GDP over the past three years.
As seen from that vantage point, the prospects for global rebalancing should be more dependent on a shift in the mix of global saving rather than on a realignment of the world's relative price structure through currency adjustments.
How else can you explain record household debt service burdens in a low interest rate climate?
To the extent American homeowners cut back on the equity they extract from their housing investments, they will need to return to more of an income-based mindset in shaping their saving and spending decisions.
My guess is that US consumers won't wake up to the urgency to rebuild income-based saving until they face some sort of a shock that raises questions about job and income security.
So it all boils down to the macro question of the hour - the consumption response to the bursting of the US housing bubble.
Let dollar fall or risk global disorder