Meltzer: It’s not a big step. It doesn’t address the principal problem, which is to get more incentives into the system so there are better adjustments of exchange rates.
Two reasons. The U.S. has an unsustainable current-account [trade] deficit. This year it will borrow $800 billion, much of it from China. And many other countries of Asia have pegged to China just as China has pegged to the U.S. dollar. As a result, Asia’s total dollar holdings now are around $2 trillion. They have probably separated themselves from the need to take advice from the IMF.
If you look at the numbers, growth rates are good and exports high in most countries, and they have a coprosperity sphere with the Chinese. That is, the Chinese export to the United States but they export to China, so there’s a good deal of cooperation. But from a long-term standpoint, that’s not a winning strategy. They depend much too heavily on exports to the United States. They’re practicing mercantilism, keeping currencies cheap and promoting employment.
You see the Chinese taking advantage of that in APEC and other Asian institutions where they try to keep the United States out and form a bloc of their own. So that could be. China has certainly organized things to make that a likely [outcome]. Unfortunately for the Chinese, all those countries trade heavily with the United States also. Just as they don’t want to have a fight with the Chinese, they don’t want to have a fight with us either.
It’s late in the day, but the managing director has now decided to have international meetings to discuss imbalances between countries. I don’t think he is in much of a position to force any changes.
We’d need the IMF if there is a financial crisis to make sure it doesn’t spread. That was its original role, and that should be its role now.
If it could get a consortium of countries to insist upon China making reforms, and be willing to sanction them if they didn’t, that would be a move in the right direction. They wouldn’t want to do anything precipitously because that could bring on a crisis. But we want to get started on a path so that, two or three years from now, we won’t be looking at China having $1.5 trillion in reserve.
