So how do you get here from here? What policies will the US propose to raise US savings? Will it put a VAT tax into play to discourage all consumption including imports? (Ouch!) Will it subsidize savings accounts with more tax breaks? What is the plan to achieve the rhetorical end sought by the Obama Administration? And what are the incentives for Germany, Japan and other surplus county exporters? What would their governments do to to spur consumption at home?
While we know that some of these steps need to be made what if we cannot agree on the nuts and bolts or enabling policy coordination?
Well, that's why God invented exchange rates.
Exchange rates are supposed to rebalance these imbalances. The dollar has been kept too strong for too long in the face of widening deficits. The adjustment system has failed to work; it failed to choke off this huge volume of imports. China's FX rate has been too low The EMU rate has been too low, the yen has been too low. So if this initiative fails you can expect the dollar to be one of the factors to move to create what policymakers refuse to create on their own.
One deliciously ironic things is that everyone complains and wonders about foreigners continuing to buy our debt. But buying less of it is exactly the remedy. It was the continued aggressive purchases of dollar assets that supported the dollar and kept it from falling in the face of huge deficits. Had the dollar fallen, US exports would have been stronger and imports weaker with a resulting favorable impacts on the trade balance.
We have gotten too deep into this hole because some countries- without thinking - were willing to buy huge amounts of US-based financial paper. Those purchases supported the dollar and financed the US deficit and financed their own continuing trade surpluses.
In economics all the pieces usually fit together. They do again in this case. So we should watch the G-20 closely and see if the policymakers have any workable ideas or if the grandiose rhetoric will go down in flames in the foreign exchange market.