Greenspan's advice
Greenspan's advice
Published: April 13 2006 03:00 | Last updated: April 13 2006 03:00. Copyright by The Financial Times
Market interest in global imbalances waxes and wanes but the economic facts do not change. The US current account deficit is unsustainable in the long run. To reduce it to manageable proportions by means other than a global recession will require macroeconomic policy changes on the part of surplus countries as well as the US itself. These will have to be accompanied by big shifts in real exchange rates to alter the relative prices of imports and exports, traded and non-tradeable goods, even though exchange rate moves in isolation will not do the trick. The question is how to get from the current equilibrium, which rests on imbalances, to a more durable one.
To some this cries out for formal international policy co-ordination, along the lines of the 1985 Plaza accord. Today's version would include Asian economies agreeing jointly to revalue against the dollar. But Alan Greenspan, former chairman of the Federal Reserve, told the FT Asian Financial Centres summit yesterday that this is both "unlikely" and "probably ill-advised".
Some global policy co-ordination is desirable. By definition, exchange rates are issues of multilateral concern. Moreover, it may be easier for national leaders to make the case for difficult domestic adjustments if others are sharing the pain. But Mr Greenspan's suggestion that a more plausible path to global adjustment is for individual countries to allow market forces to operate more effectively is well taken.
To focus narrowly on China is misleading: the increase in its surplus since 1996 is about one-sixth the increase in the US deficit. The counterpart of the rising US deficit is rising surpluses in emerging markets and oil exporters in general. However, oil exporters have finite resources. Among non-oil exporters, China does stand out for the pace of its reserve accumulation: up $541bn (£309bn) in three years, including a $112bn increase since adopting a new currency arrangement last July. This is evidence that it has been frustrating market forces (as well as suffering the consequences of policy gradualism in the form of speculative capital inflows). Other Asian economies show consistent big increases in reserves, too.
These countries need to tackle far more urgently the domestic causes of external imbalances (perverse capital allocation and self-insurance in China, poor productivity in non-tradeable sectors elsewhere in Asia), while allowing greater currency flexibility. The price signals from Asian currency appreciation would support the reorientation of production towards domestic markets - while conveying the opposite price signals in the US.
This would not eliminate the need for painful changes in the US, including a substantial rise in national savings. But it would provide the best possible global environment for such a necessary adjustment.
Published: April 13 2006 03:00 | Last updated: April 13 2006 03:00. Copyright by The Financial Times
Market interest in global imbalances waxes and wanes but the economic facts do not change. The US current account deficit is unsustainable in the long run. To reduce it to manageable proportions by means other than a global recession will require macroeconomic policy changes on the part of surplus countries as well as the US itself. These will have to be accompanied by big shifts in real exchange rates to alter the relative prices of imports and exports, traded and non-tradeable goods, even though exchange rate moves in isolation will not do the trick. The question is how to get from the current equilibrium, which rests on imbalances, to a more durable one.
To some this cries out for formal international policy co-ordination, along the lines of the 1985 Plaza accord. Today's version would include Asian economies agreeing jointly to revalue against the dollar. But Alan Greenspan, former chairman of the Federal Reserve, told the FT Asian Financial Centres summit yesterday that this is both "unlikely" and "probably ill-advised".
Some global policy co-ordination is desirable. By definition, exchange rates are issues of multilateral concern. Moreover, it may be easier for national leaders to make the case for difficult domestic adjustments if others are sharing the pain. But Mr Greenspan's suggestion that a more plausible path to global adjustment is for individual countries to allow market forces to operate more effectively is well taken.
To focus narrowly on China is misleading: the increase in its surplus since 1996 is about one-sixth the increase in the US deficit. The counterpart of the rising US deficit is rising surpluses in emerging markets and oil exporters in general. However, oil exporters have finite resources. Among non-oil exporters, China does stand out for the pace of its reserve accumulation: up $541bn (£309bn) in three years, including a $112bn increase since adopting a new currency arrangement last July. This is evidence that it has been frustrating market forces (as well as suffering the consequences of policy gradualism in the form of speculative capital inflows). Other Asian economies show consistent big increases in reserves, too.
These countries need to tackle far more urgently the domestic causes of external imbalances (perverse capital allocation and self-insurance in China, poor productivity in non-tradeable sectors elsewhere in Asia), while allowing greater currency flexibility. The price signals from Asian currency appreciation would support the reorientation of production towards domestic markets - while conveying the opposite price signals in the US.
This would not eliminate the need for painful changes in the US, including a substantial rise in national savings. But it would provide the best possible global environment for such a necessary adjustment.
posted by Carlos T Mock at 3:20 PM
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