Exchange Rate Disorder

NEW YORK – Two troubling features of the ongoing economic recovery are the depressed nature of world trade and the early revival of international global payment imbalances. Estimates by the International Monetary Fund and the United Nations indicate that the volume of international trade in 2010 will still be 7% to 8% below its 2008 peak, while many or most countries, including industrial nations, are seeking to boost their current accounts.

Indeed, if we believe the IMF’s projections, the world economy’s accumulated current-account surpluses would increase by almost $1 trillion between 2009 and 2012! This is, of course, impossible, as surpluses and deficits must be in balance for the world economy as a whole. It simply reflects the recessionary (or deflationary) force of weak global demand hanging over the world economy.

Under these conditions, export-led growth by major economies is a threat to the world economy. This is true for China, Germany (as French Finance Minister Christine Lagarde has consistently reminded her neighbor), Japan, and the United States.

Countries running surpluses must adopt expansionary policies and appreciate their currencies. More broadly, to the extent that major emerging-market countries will continue to lead the global recovery, they should reduce their current-account surpluses or even generate deficits to help, through increased imports, spread the benefits of their growth worldwide.