Global Savings-Investment Imbalances: What Role for East Asia?

This paper examines the current path of global imbalances and the role of East Asia in addressing these issues. The roots of the problem are the exploding budget deficit and soaring current account deficit of the United States. The twin deficits are being financed by foreign savings including the placement of the massive foreign exchange reserves of East Asia in U.S. dollar-denominated debt, such as U.S. Treasury notes. Solving the imbalances will require corrections of internal and external imbalances by both the United States and its trading partners. How East Asia deploys its reserves could set off a tsunami of sales of dollar-based assets that could disrupt the U.S. and global economy. Sharp exchange rate adjustments (particularly a large fall in the U.S. dollar), and a protectionist backlash against the U.S. current account deficit, are in no one's interest as they could trigger global shocks. (c) 2007 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.