Rebalancing the global economy

This graph from the UN Dept. of Economic and Social Affairs displays, among other things, the pressure on the dollar. As a so-called "reserve currency," the dollar has become a commodity in itself, and not simply a medium of exchange. As we've written elsewhere, a correction has long been called for by all standard economic theory.

A collapse in the value of the dollar, however, is not the best way to resolve the imbalance, believe it or not. It leaves the rest of the world -- notably China, Japan and other developing nations -- holding the dollar bag. They lent us the money to buy their products. Now we are saying we'll pay them back in cheaper dollars.

The flip side is they depend on our markets for their economic activity. The slide of the dollar means a rise in their currency (unless China continues to starve itself in its obstinance). The UN DESA puts it this way:

A global contraction, triggered by a tight reining in of domestic spending in the United States is one way out, but this is neither what the United States or the rest of the world would hope for. Equally disruptive would be a large and rapid devaluation of the dollar. The alternative is a long- term strategy of re-switching the impetus of global demand growth to surplus economies, mixed with a rebalancing in the United States, from household consumption to business and infrastructural investment.

They correctly suggest free marketeers and their nannies in the central banks have a different notion, a short-term fix of cheap money:

Some commentators still argue that the best chance of the United States economy, and with it the world economy, regaining a degree of balance is to allow the market mechanism to re-price risk, adjust exchange rates and weed out irresponsible investors. Th e decisiveness with which central bankers reacted to the crisis is a clear sign that financial markets cannot be left to their own device and that some form of intervention is necessary. But to spare the world economy from a succession of similar crises, equally decisive action is needed by policy makers to correct the global imbalances.

Business and infrastructure investment is productive and forward-looking. Equally forward-looking would be a wholesale shift to producing new energy technology and equipment as merchandise for trade with the rest of the world. Better and more stable, at least, than producing small green pictures of men in powdered wigs.

This is the rational, cooperative and stable approach. We think it has as much chance as another proposal of similarly broad and coherent view, proposed last year for the calamity in Iraq. That would be the proposal from George McGovern and William R. Polk to rebuild that country from the inside. The tough answers then and the hard-headed answers now will likely take another road. Then into the slough of hell, here into a further feeding of the financial sector. Both result not in stability and a way forward, but in a ratcheting up of the dangers and going further down the wrong road.