When world financial leaders meet in Singapore this month for the joint World Bank/International Monetary Fund meetings, they must confront one singularly important question. Is there any way to coax the IMF’s largest members, especially the United States and China, to help diffuse the risks posed by the world’s massive trade imbalances?
This year, the US will borrow roughly $800 billion to finance its trade deficit. Incredibly, the US is now soaking up roughly two-thirds of all global net saving, a situation without historical precedent.
While this borrowing binge might end smoothly, as US Federal Reserve Chairman Ben Bernanke has speculated, most world financial leaders are rightly worried about a more precipitous realignment that would likely set off a massive dollar depreciation and possibly much worse. Indeed, if policymakers continue to sit on their hands, it is not hard to imagine a sharp global slowdown or even a devastating financial crisis.
Although Bernanke is right to view a soft landing as the most likely outcome, common sense would suggest agreing on some prophylactic measures, even if this means that the US, China, and other large contributors to the global imbalances have to swallow some bitter medicine. Unfortunately, getting politicians in the big countries to focus on anything but their own domestic imperatives is far from easy.