To find the implications of these deficits on the global economy I met the maverick economist and political commentator, Mr. Swamy. “Swamy, tell me, is the US living way beyond its means?” I asked him upfront and as a matter of doubt. “No doubt about that Narada. Moreover, the existing global arrangement is highly skewed and is not only unsustainable for the US but for the entire world.” I requested Swamy to elaborate. “Narada,” he said in an assured voice, “I have been pointing out this problem for over a decade now. Since the SE Asian crisis, countries have found the virtues of a weak currency. This helps them to subsidise their exports and simultaneously build up their FE reserves.” Obviously, Swamy was hinting at competitive under-valuation of the many Asian currencies, led by Chinese Yuan. This meant that countries had developed a fetish for cheap exports and through it accumulation of FE reserves. More importantly, this arrangement translated into job opportunities for millions in developing countries. No wonder the cliché - if America catches cold, the rest of the world sneezes.
“So what is the problem?” I enquired. “See,” Swamy explained, “at the root of the problem, is the individual American lifestyle which thrives on vulgar consumption. Weak global currencies mean lower import costs to Americans. This suits the Americans as well as exporting countries but results in a global imbalance.” I could understand the issue at some length now. “How do you correct this?” I enquired innocently as if global imbalance required minor corrections. Swamy replied, “Multilateral agencies have repeatedly voiced concerns over this skewed arrangement in the past few years. Americans must bring down their consumption levels and the rest of the world must increase theirs. For this we need to devalue the US Dollar against the major currencies of the world.” “Will it solve the problem then?” I enquired anxiously. “See, we are in a state of equilibrium though skewed. The skew in the long run would disturb the equilibrium and hence requires correction. But if we attempt any correction, the equilibrium is disturbed.” It took some time for me to understand what Swamy had said. “Are you suggesting turbulence in the currency markets in the days to some, whether there is an orderly correction or not.” What Swamy said was revealing. “Narada, markets are supreme. It has the power to overwhelm anything that is artificial. Currently currencies of many countries are artificially undervalued. Despite repeated suggestions by multilateral agencies, countries have refrained from attempting a self-controlled course correction.” “Are you for an orderly self-correction?” I asked anxiously. Swamy said, “If countries do not revalue in an orderly fashion, we run the risk of a Dollar collapse. In such an eventuality growth of developing countries would be retarded by two decades.” “What if developing countries go in for an orderly revaluation? Will it be an insurance against a sudden Dollar collapse?” I enquired anxiously. Swamy had a hearty laugh and replied “Narada, if developing countries go in for an orderly revaluation, instead of losing two decades they would lose only twenty years! We are caught between Scylla of a dramatic Dollar collapse and Charybdis of developing countries revaluing their currencies in an orderly fashion.”