DA: Well this [the global savings glut] isone of the major problems that we’ve had that lead to the major crisis that startedin 2008.
Many people are not necessarily aware of the fact that a lot of the liquidity thatfound its way into some of the crazy products that created the credit bubble and the realestate bubble and eventually all the pain that followed, really was a result of whatwe call the global savings glut.
The fact is that the major exporting countries accumulateda credit account surplus, and therefore a really large amount of foreign exchange reserves,while the 14 countries, like the United States, accumulated really large deficits in currentaccount deficits.
This is because, in essence, they were the borrower and the spender oflast resort.
So the major exporting countries like China pretty much has, at this point,a foreign exchange reserve war chest of close to, in fact more than $2.
It isbelieved about 70 percent of it is actually invested in U.
assets, many of them in factfound their way into U.
And they are helping to keep interest rates reallylow in this country, which, again, fueled a lot of the credit bubble that lead to thecrisis.
Other exporting countries which carry really large surpluses are Germany and mostof the Asian countries.
That is a major issues, and it does create a constant systemic instability.
It is my view that eventually when everything is said and done, at the end of this crisis,there will be some major changes not only in terms of capital requirements for financialinstitutions and for banks and from the regulatory point of view, but certainly also from thecurrency exchange system.
DA: Every time we’ve had a crisis of thismagnitude there was eventually some change in the way we deal with each other, the paymentlevel.
I mean just looking at the last 60, 70 years after World War II, we had the Bretton-WoodsAgreement, which basically banked most of the currencies to the U.
dollar and thenmade the U.
dollar convertible into gold at a fixed price of $35.
That went out thewindow in the 70s, with the Nixon administration, during the great crisis of the 70s, with thechaos following the Vietnam War and those deficits in those days, and that created asystem that we have today, which has been very unstable of currencies, some of whichare very freely flowing and some are not freely flowing at all.
Some are managed and someare very manipulated.
And that’s been a source of constant imbalances.
I believe thatprobably in the future there will be some readjustments.
Maybe the inclusion of theSDRs, a Special Drawing Rights, which is a special currency which is only used internallyat the IMF, International Monetary Fund.
Or maybe a resurgence of gold, not necessarilyas the center of our global payment system, but maybe as part of it.
Some change, I believe,will definitely come to light in the future.
DA: Well obviously so far it has helped [China]tremendously in being the low-cost producer and exporter of the globe.
And that’s whythey very actively trying to manage the currency and keep it very much undervalued to– versus,say, the U.
dollars and the Euro and some other freely flowing currencies.
But thatcomes with a price, and that is basically a subpar financial system that can now reallydeal efficiently with investment from abroad.
It does not provide great choices to its citizensin terms of investment choices.
And certainly the major problem is inflation, and that issomething that is now being recognized in Beijing, and it’s being questioned whetheror not the advantages that come from having an undervalued currency are still better thanthe disadvantages that are coming with the inflationary pressures that are clearly breakingup in the system.
So it is now believed that steps are being taken in Beijing and thatthe renminbi will be allowed to revalue, probably at least five percent this year, and thatsome other steps are being taken in the direction of creating a better system.
At the end ofthe day, if China wants to be the next economic super power, it cannot have a currency thatis not convertible, that is subsidized, that is undervalued.
It will have to take all thesteps to create a strong full convertible currency.
DA: Well, again, for now there’s a fairlyvery strict pact, about 6.
5 renminbi per dollar, and that’s fully managed by the Chinesegovernment, and there’s only a little bit of fluctuation that is allowed.
It is believedthat the range of fluctuation will be expanded, and that will lead to a gradual revaluationof the renminbi over the next few months.
But also, steps are being taken in terms ofrebalancing those situations of this equilibrium that we were talking about before.
And soChina’s now trying to actually create an internal demand and not being so reliant onjust exporting goods to the rest of the world.
And that’s what the system eventually needs.
It needs a much more balanced economic system where the United States will be not necessarilyalways the last resource spender and borrower.
And we’re trying that in Germany, and someof the other exporting countries will now rely strictly on exporting their goods andservices to the rest of the world.
Again, exporting countries will have to increaseinternal demand and the United States will have to decrease its spending binge.
Untilnext time, this is Davide Accomazzo.
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