Martin Wolf


Rolf Englund IntCom internetional

Home - Index - News - Krisen 1992 - EMU - Economics - Cataclysm - Wall Street Bubbles - US Dollar - Houseprices

Sustained recovery requires decreased domestic US spending and
increased domestic spending in China and much of the rest of the world,
together with adjustments in exchange rates.

Olivier Blanchard, Financial Times, June 18 2009
The writer is chief economist of the IMF

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.
To caricature: get US consumers to spend less. Get Chinese consumers to spend more.

It was clear that much Chinese saving reflected the absence of a social safety net.
Providing health and retirement insurance was desirable on its own, and would naturally lead consumers to spend more.

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:
US consumers are, at last, cutting their spending.
They have lost a lot of wealth, and it will take them many years of additional saving to undo that loss.
And, more importantly, they have learnt a more general lesson. The world is more risky than they thought. Stock and housing prices can go down, and go down a lot.
Planning for retirement may require saving a lot more than was thought wise before the crisis hit.

What if there is no rebalancing?

While strong fiscal stimulus was and still is needed to fight the crisis, it cannot go on forever;
at some stage, debt dynamics become unsustainable, markets react and fiscal deficits become counterproductive.
Neither a weak US recovery nor unsustainable US debt dynamics are likely to be good for the world.
The first probably means a stalled world recovery;
the second probably means mayhem in financial markets.

Full text

Blanchard Economic Research December 30, 2000

Olivier Blanchard

Since there will not be enough workers earning income, there will not be enough savings generated to purchase the assets the retirees must sell to finance their retirement.
Jeremy Siegel, Wall Street Journal, September 20, 2006


If something cannot go on for ever it will stop.
U.S. Trade Deficit: Causes, Magnitude and Consequenses
Rolf Englund 2001-05-21

Top of page

Let dollar fall or risk global disorder
Is it 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
Martin Wolf, Financial Times, May 9 2006

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
The point emerges in a simple way from examination of the trends in exports and imports as a share of US gross domestic product (see chart). It has been made more rigorously by Maurice Obstfeld of the University of California at Berkeley and Kenneth Rogoff of Harvard

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.

Full text

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
a set of policies that would facilitate global adjustment.
Brad Setser 28/3 2007

Top of page

The Unsustainable US Current Account Position Revisited
Maurice Obstfeld and Kenneth Rogoff
First draft: October 14, 2004, This draft: November 30, 2005

Kan man undvika recession i USA när man måste minska importen med 600 miljarder dollar?
Rolf Englund på Nationalekonomiska Föreningen 30/11 2004

Interesting times ahead for all
Rolf Englund, Letters to the Editor,
Financial Times, November 6, 2000

Euron spricker när dollarn faller
Rolf Englund Nya Wermlands-Tidningen 2001-01-08