Rolf Englund IntCom internetional
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Sustained recovery requires decreased domestic US spending and
In 2007, worried about the growing size of current account imbalances, the International Monetary Fund organised multilateral consultations to see what should be done about it.
There was wide agreement that the solution was conceptually straightforward.
It was clear that much Chinese saving reflected the absence of a social safety net.
It was an impressive piece of global macroeconomic planning. But, at least until the crisis, not much happened
As if to prove the sceptics right, the crisis itself was not triggered by global imbalances. The dollar did not collapse, as feared.
As the crisis evolves, however, and we start looking at eventual recovery, the issue of global imbalances is likely to return to the fore.
Half of the adjustment suggested in the multilateral consultations is coming into play:
What if there is no rebalancing?
While strong fiscal stimulus was and still is needed to fight the crisis, it cannot go on forever;
The Return of STAGFLATION
If something cannot go on for ever it will stop.
Let dollar fall or risk global disorder
China’s foreign currency reserves grew by $680bn between January 2001 and January 2006, in a successful attempt to keep the value of the renminbi down.
The big question is whether the Chinese, Japanese and others are right to believe that a large fall in the dollar can be avoided.
The question here is a different one, namely, whether it is possible to reduce the US deficit substantially without exchange-rate changes. The answer is that it would be possible, but catastrophic for all participants, because it would demand a deep US recession which would almost certainly end the US commitment to liberal trade.
Without any shift in relative prices, overall demand in the economy needs also to fall by just under 10 per cent, to deliver the desired reduction in the trade deficit. This would generate a fall of about 7 per cent in GDP, all of which would fall upon industries producing non-tradeables. But such a deep recession would create misery, while contributing nothing to the desired improvement in the external deficit.
Could these changes in real exchange rates be achieved without moves in nominal exchange rates? The logical answer, again, is yes. But that would require a fall in the nominal price of non-tradeables in the US – in other words, outright deflation in that country
Economists working for Deutsche Bank have called the present informal exchange-rate arrangement “Bretton Woods 2”. Remember that the US destroyed Bretton Woods 1 in 1971, by imposing an import surcharge and forcing currency appreciation. This led to a decade of monetary disorder. This disastrous outcome was the result of resisting adjustment too long.
The Peterson Institute, Bruegel and the Korean Institute for International Economic Policy recently sponsored a workshop on global adjustment. Alan Ahearne, Bill Cline, Kyung Tae Lee, Yung Chul Park, Jean-Pisani Ferry and John Williamson then joined forces to outline
The Unsustainable US Current Account Position Revisited
Kan man undvika recession i USA när man måste minska importen med 600 miljarder dollar?
Interesting times ahead for all
Euron spricker när dollarn faller