This month’s International Monetary Fund (IMF) meetings in Washington will bring together the world’s top finance ministers and central bankers at a critical juncture for the global economy.
For starters, the roof is starting to collapse on the global housing bubble, as housing markets begin to freeze up not only in the United States, but also in many other countries, such as high-flying Spain. Moreover, money markets, especially in Europe, remain traumatized by the festering global credit crunch. Record-high food and energy prices, combined with sharply rising wages in China, are pushing up inflation in much of the world. Last, but not least, the US productivity boom is decelerating.
These combined pressures will make it far more difficult for central banks to sustain the so-called “Goldilocks” economy (“just right” inflation and growth). At the same time, the outside world will be looking especially carefully at what, if anything, officials plan to do if the dollar continues to sink. Though exchange rates are notoriously unpredictable, the best guess is that a slow unwinding of the massive US trade deficit will keep the dollar on a path of gradual long-term decline.
But the fact that several Asian and emerging-market countries are resisting this decline by buying dollars is putting inordinate pressures on the more flexible currencies, such as the euro and the Canadian dollar, which are trading at record levels. (What are the Chinese planning to do with all their ever-growing $1.4 trillion in reserves? Do they intend to give foreign athletes paper bags stuffed with dollars as a welcoming present at the Olympic village?)