The IMF and Dollar Depreciation

I have a post on Demography Matters which while ostensibly being about Iceland is in fact unavoidably about the global imbalances situation and how such imbalances may or may not 'correct' in the light of our current demographic realities. The heart of this issue is really whether there is any straightforward and 'classic' way to address the US current account deficit. Brad Setser and Nouriel Roubini have of course been in the forefront of urging the 'dollar correction' remedy. I see from the FT this morning that the IMF has now added its voice to the chorus:

"The International Monetary Fund on Wednesday stepped up the pressure for far-reaching shifts in exchange rates, declaring that the dollar will have to depreciate “significantly” over the medium term if global economic imbalances are to be resolved in an orderly fashion."

I guess this would be the point: "if global economic imbalances are to be resolved in an orderly fashion".

I seriously question whether any such shifts are possible, especially in the medium term where Geramny Italy and Japan's problems can only increase not decrease.

The IMF obviously mention the Asian currencies, but as the FT notes "it shied away from giving any specific figures as to the extent of appreciation required".

My personal feeling is that they are wise to refrain from so doing. Clearly *some* Asian currencies can steadily appreciate, but at a rate which will not resolve the imbalances issue appreciably, others (like the Tigers) are themselves rapid agers, and will have their own issues.

What, I think, we need to keep very clearly in mind here is not the relative size of the various populations, but the relative values of the GDPs (both per capita and in absolute terms).

I think a lot of people are now way out of their depth in all of this. A key component of the current IMF view would seem to be this:

"The IMF sharply increased its estimates for growth in Japan, to 2.8 per cent this year and 2.1 per cent next, declaring that the expansion there is now “well-established”."

Of course, if the IMF are right that the Japanese expansion is now 'well established' then the picture begins to change, but I think there are plenty of grounds for serious doubt that it is, and if it isn't, then it'll be another kind of correction that we are about to see.

I think the core of what I am saying is that many of these problems are fairly complex and hard to handle. Simplistic solutions, and platitudes (which is what I think the IMF are going in for) just don't contribute anything useful.

There is always a trade-off.

If what you really think is the most important thing in the short to mid term is correcting the US CA deficit, then Bernanke simply needs to continue doing what he is already doing and keep raising rates. In the short term this will push the dollar even higher, but as it grinds down growth in the US it will begin the correction in the CA deficit. The issue is whether or not you think the price is worth paying.

Ditto the Federal Deficit, reducing this may or may not help the CA deficit, but it would reduce growth in the US, which would indirectly help, but only at the cost of making those who are already worried about a weak labour market even more worried.

Bottom line, the IMF WEO was on a much better level when Rogoff was Chief Economist, and the BIS publications seem to be a much better read these days, as they seem to be getting much nearer the core of what globalisation really means.