It was on every's agenda last two years, the question of soft or hard U.S. landing in an environment of global imbalances. The potential reasons for massive disequilibria were manifold: Twin deficits, low U.S. savings coupled with an excessive surge in assets markets, asymmetric price elasiticites of U.S. exports and imports, export-led growth strategy of China with massive reserve accumulation and finally Bernanke's global savings glut.
Most economists advocated a significant dollar depreciation in terms of its real effective exchange rate. Some analysts simulated the necessary depreciation in order to lead international balance-of-payments relations to sustainable paths (i.e. Obstfeld/Rogoff: 30%, Cavallo/Tille: 35%). However, as Morgan Stanley economist Stephen Roach emphazied, the real effective dollar already depreciated against its trade counterparts by more than 16% and the U.S. current account deficits decreased just slightly to 5.8%. According to Roach, global rebalancing will not take place via realignment of the world’s relative price structure through currency adjustments, but via a re-mixture of global savings and consumption. The consumption response to the bursting of the US housing bubble, thus, may be the macro question of the hour.
We'll see.
