Great discussion between Martin Wolf and Stephen Roach over at Bloomberg.com. Is the US/China bilateral trade imbalance due to inadequate US savings or Chinese currency policy?
I’ve got a lot of time for both sides, which is frustrating. But here’s the thing: You can beat up on the USA for inadequate savings. But this is a bit like saying to an indebted shopper, Get your finances in order! But don’t stop shopping! What? I really think the capital account bears some responsibility for the over-indulgence of the borrower. Capital was pushed at the US economy by the decisions of others; namely, because of foreigners’ appetite for US financial assets. What is the flip side of a capital account surplus in a floating exchange-rate regime? Exactly my point. These things are accounting identities. The US laissez faire attitude to the external accounts leaves it at the mercy of others’ exchange-rate-regime policy. That might be fine 99% of the time, but when an exporter the size of China comes along, it’s going to make for an interesting story. And it sure has.
Over the last 12 months I’ve come round to the view that the US needs a pro-active approach to the dollar. That’s a huge shift in my thinking, because (a) I like the laissez-faire approach to exchange-rate determination, and (b) I don’t like beating up on China for being so successful as a saver and an exporter. (“Punish the creditor” initiatives often come up whenever reform of the international financial system is discussed. Predictably, they go nowhere. The Bretton Woods system itself was at one point meant to contain a provision to levy a fine against countries which run too-big or too-persistent external surpluses. This was aimed directly at the export leviathan of the time, the USA, and you can guess what Washington thought of it.) So if we can’t tell a sovereign nation what to do with its external monetary arrangements, then we’ve got to consider our own. Perhaps the mere idea of serious contemplation of this would be enough to spur changes abroad.
There is so much more on this topic. Stay tuned.