Citation:
Date Published:
Nov 3, 2005Abstract:
Three propositions have become conventional wisdom in Washington and elsewhere. Americans save too little. As a consequence, the US current account deficit is unsustainably large. A necessary step to bring the global economy into sustainable balance is a significant appreciation of the Chinese currency, which in practice has been fixed to the dollar for over a decade. All these separate but related propositions are highly questionable. This policy brief addresses each in turn. It suggests that Americans save quite enough for future generations, that the startlingly large US current account deficit is not only sustainable but a natural feature of today's highly globalized economy, and that a revaluation of the Chinese currency, far from alleviating global imbalances, would run the risk of precipitating a financial crisis. These claims are not meant to suggest there are no problems with the current state of affairs. Rather, this brief suggests that events need to be interpreted in light of the evolution of the US and world economies in recent years and that this interpretation will put the global imbalances in a different perspective.