Nouriel Roubini has a great post at Global Economics Blog, laying out various views on global imbalances, filled with commentary (familiar but still compellingly presented) on why all but one of the five views presented is wanting. In the order they appear--
The Dooley/Garber/Folkerts-Landau "Bretton Woods Two" view:
Garber claims that global imbalances are not caused by “US fiscal profligacy”, i.e. the US budget deficits. He presumably views the latest US fiscal deficit as driven by a transitory increase in military (and homeland security) spending related to the "temporary" wars against terrorism, Afghanistan, Iraq and the need to prepare to confront other rogue states (Iran, North Korea, etc)...
Moreover, in the Deutsche view, China and Asia desire to run current
account surpluses and they will eagerly finance the US for a generation or more as China needs to absorb hundreds of millions of rural workers in the urban sector and Asia loves a mercantilist export-led growth model. Thus, there is no problem to solve and we do not need either an adjustment of quantities (fiscal and current account) nor an adjustment of prices (exchange rate).
Ronald McKinnon's case for fixed exchange rates:
... he is in favor of a US fiscal adjustment that will reduce such global imbalances. However, he believes that a Chinese or Asian currency move is inappropriate. The global rebalancing can fully occur, in his view, via "expenditure reduction" policies without the need for the "expenditure switching" effect of changes in nominal and real exchange rates. His view is based, in part, on his long-standing arguments that a regime of global fixed exchange rates among major economies (US, Europe, Japan/Asia) would be ideal. In his view, currency adjustments are destabilizing rather than stabilizing.
Ben Bernanke's "global savings glut" argument:
Bernanke has argued that the US current account deficit derives from a "global savings glut" rather than a lack of US savings. US fiscal deficits may be a problem but their reduction may not shrink a US current account deficit whose source is - in his view - foreign, not domestic. Foreign investors' willingness to finance the US current account deficit will continue for quite a while as this global savings glut is attracted to the high growth and returns of the US. But the Chinese/Asian currencies may need to appreciate and the US dollar fall to adjust over time the current account imbalance. A currency move will benefit the US, regardless of US fiscal adjustment, as net exports will sharply increase once the dollar falls. While a fiscal adjustment is not crucial for global rebalancing, in the Fed's view, a fiscal adjustment will occur in the US by default and semi-automatically via the political process.
Richard Coopers "safe haven" thesis:
Richard Cooper's view is clear from the title his recent Financial Times column: "America's current account deficit is not only sustainable, it is perfectly logical given the world's hunger for investment returns and dollar reserves".
And, finally, the Roubini-Setser hard-landing scenario.
I refer to our view as the "consensus view" as a large number of authoritative commentators have expressed serious concerns about the U.S. "twin deficits," the sustainability of the U.S. public and external debt accumulation and the risks deriving from the reliance on foreign central bank financing of these twin imbalances...
As we have argued before, orderly global rebalancing requires both "expenditure switching" via a Chinese/Asian appreciation relative to the US dollar and other floating currencies and, at the same time, "expenditure reduction" via a meaningful reduction of the US fiscal deficit that will require some increases in taxes.
I'll accept that as the consensus view -- although I am not entirely sure that what I have excerpted clearly separates them from, say, Ben Bernanke. That's why I think what really distinguishes Roubini and Setser is their belief that the adjustment will not be pretty:
... if the reduced foreign financing occurs without a parallel reduction in the U.S. fiscal deficit (in part via tax increases), then we are in hard-landing scenario, where the reduced supply of financing hits a still-persistent demand for fiscal deficit financing. In that case, not only the dollar does sharply fall, but long-term interest rates shoot up sharply, prices of risky assets (housing, equities, high-yield debt) fall sharply, a systemic crisis occurs and we risk a U.S. and global economic slowdown, if not an outright recession, as sharply higher real rates and negative wealth effect reduce private consumption and investment. In that scenario, the trade deficit will shrink in a disorderly and recessionary way for the U.S. and global economies.
The presentation is inevitably a bit one-sided, but not unfair, and nobody frames the issues better.
Side note: General Glut links to a Bloomberg article with this bit of information:
The yen may advance for a fourth week against the dollar and the euro on speculation China is moving closer to letting its currency strengthen, a Bloomberg News survey shows.
Sixty percent of the 45 strategists, investors and traders polled on April 29 from Sydney to New York advised buying the yen against the dollar. The same number said to purchase Japan's currency versus the euro, the most since June. Participants also recommended buying the dollar against the euro.
China, the biggest market for Japanese exports, is likely to let the yuan appreciate within three weeks and spur a rally in the yen and other Asian currencies, said Jens Nordvig, a strategist at Goldman Sachs Group Inc. The yen is near the highest in a month on expectations a gain in the yuan will make Japan more tolerant of appreciation in its currency.
UPDATE: You may also want to check out this post at The Capital Spectator, documenting further pressure on the Chinese peg from the U.S. government.
Robert Portman, the newly minted U.S. trade representative, promises to get tough with China. Red ink is the reason.
"Part of [the U.S. trade] deficit is because the Chinese do not always play by the rules,'' he told the Senate Finance Committee via Bloomberg News a week before he received confirmation for ascension to the trade post from his former life as a Republican congressman from Ohio.
The presumption is that by getting tough with China, which includes forcing the Middle Kingdom to float its currency, the U.S. trade deficit will fade, if not disappear...
U.S. Under Secretary John Taylor seems eager to have China float its currency. "We have very much stressed that they can begin to have a flexible exchange rate right now," he says courtesy of Reuters. That's diplomatic speak for suggesting that Beijing float sooner rather than later.
UPDATE: See also this post at The Skeptical Spectator.