America consumes less, exports more. China consumes more, exports less. The US dollar smoothly transits from being a strong currency that reassures foreign holders of American public debt to a relatively weaker currency that allows American exports to grow. The Chinese renminbi transits from being a weak currency that pushes Chinese exports to a relatively stronger one that becomes part of a strategy of pushing up domestic demand. Such, in broad strokes, is the economists’ vision of an ideal post-crisis world and economists have urged G-20 leaders to begin consultations on this at their Pittsburgh summit this week.

Economists are right to say this rebalancing of the global economy is at the heart of any global economic reform. It makes both America and China more stable economies. It reduces the supply of cheap cash to American finance (the cheap cash came from China financing America’s current account deficit). It makes America explicitly acknowledge that its public debt cannot keep indefinitely growing. It makes China explicitly acknowledge that aggressive currency manipulation cannot indefinitely be the choice for a future economic superpower. If all of this happens, the global economy will be better and safer.

So, yes, rebalancing is more important than new financial regulation, which gets the most media attention. Also, on regulation, a G-20-wide consensus is probably impossible to achieve; it is probably undesirable, too. The most basic regulation reform will be a formula that makes banks keep aside more capital as a boom begins. But this formula will depend on every country’s specific economic-political-financial structure and the internal negotiations it produces. The G-20 can at best talk up the need for such prudence. The rule of finance, as clearly seen in the aftermath of the crisis, is that each country buries its own dead. Therefore, efforts to make finance firms lead a less adventurous life should be country-specific as well.

... contd.