Bergsten: The Dollar and the Deficits

by

Fred Bergsten has a lengthy piece titled “The Dollar and the Deficits” in Foreign Affairs.

In brief: “The global economic crisis has revealed the folly of large U.S. budget and trade deficits, as well as the strong dollar that makes them possible. If it is serious about recovery, the United States must balance the budget, stimulate private saving, and embrace a declining dollar.”

He says that global imbalances facilitated the crisis: “These huge inflows of foreign capital, however, turned out to be an important cause of the current economic crisis, because they contributed to the low interest rates, excessive liquidity, and loose monetary policies that — in combination with lax financial supervision — brought on the overleveraging and underpricing of risk that produced the meltdown.”

He advocates reserve currency diversification: “For the United States to avoid the resulting trade imbalances and debt buildup, some of this incremental demand should be channeled into euros, renminbi, and SDRs. Both international monetary reform and a lesser role for the dollar are very much in the interest of the United States.”

Read the full article for much more.

Advertisements