from the Wall Street Journal
Michael Dooley of Deutsch Bank said:I am pleased that you brought up the "no landing" idea. We have argued that the current Asian bloc has about 10 years to absorb its excess labor and graduate from the periphery. When that is accomplished, their exchange rates will no longer be undervalued and current-account balances will return to normal levels. There will be some real dollar depreciation to service a larger stock of U.S. debt but most of the adjustment will come from rising interest rates in the U.S. and other industrial countries. We are in the soft-landing camp . . . .
It's also a mystery to us where you and others got the idea that we believe that governments that are now managing their exchange rates will finance the level of U.S. deficits that you forecast. Rather, the savings that they would send out will decline as development proceeds as described in the above reference. We have argued that it would be a natural development for the system if another periphery, seeing that this was a successful development strategy, takes their place. So yes, the system lasts for a very long time, but the China part of it gradually fades.
What will last for the foreseeable future is the U.S. role as the center country in the system. In some periods this will generate large net inflows of savings from the periphery to the U.S.; in other periods, none at all or reversals. Clearly there was no effective periphery for 20 years after the demise of Bretton Woods I, and the U.S. built a net asset position in international markets. When a new periphery emerges, we will have to carefully evaluate the incentives and constraints faced by the system at that time.
captain easychord said:like i get the overall conclusions but the actual economic reasonings goes right over my head. keep em coming though.