I was actually referring to the 2002 IMF World Economic Outlook. I must have originally learnt about it from this article (most likely the scavenged version at CommonDreams.org) but, given the standards of discourse on ET, I suppose I should refer to the original source, which is Chapter II: Essays on Trade and Finance:
How Worrisome Are External Imbalances? External imbalances across the main industrial country regions widened steadily during the 1990s. Current account surpluses in many countries and regions, including Japan, the euro are and (in the late 1990s) emerging markets in east Asia, were counterbalanced by deficits elsewhere, most notably in the United States . Indeed, in the United States and Japan, the ration of the current account balance to trade flows—perhaps the best measure of the degree of underlying imbalance—have risen to levels almost never seen in industrial countries in the postwar period. A a result, Japan is exporting 1.5% of world saving and the United States is importing 6%. [...] One of the major concerns associated with the global imbalances is the possibility of an abrupt and disruptive adjustment of major exchange rates. At the outset, it should be emphasized that exchange rates are highly volatile and unpredictable, and economists have had little success in forecasting exchange rate movements over the short term(Meese and Rogoff, 1983). Over the medium term, however, real exchange rates do tend to revert back toward the fundamental values (Taylor, 2001, and Engel, 2002). While it is difficult to know when adjustment will take place, it is essential to anticipate the potential risks and costs that may be associated with adjustment, and whether these can be mitigated by policy actions. [...] Evolution of Global Imbalances [...] There is now a gap of some 2.5% of global GDP between the current account surpluses of continental Europe and east Asia (dominated by the euro area and Japan, respectively) and the deficit countries, dominated by the United States. [...] In short, the expansion in the imbalances in the deficit countries in the 1990s reflected faster growth combined with financial excesses involving buoyant expectations about future economic prospects associated with the IT revolution. [...] Large external surpluses and deficits have also led to increasing divergences in net foreign asset positions across countries, with Japan building up net assets and the United States, net liabilities (Figure 2.3). Indeed, the foreign asset position in both countries is approaching or beyond their own historical records. [...] Are the Imbalances Viable and How Might They Adjust? [...] in the absence of revaluations of asset prices, the current forecasts implies that Japanese net assets as a ratio to GDP would rise by about one-third (to about 40% of GDP) between now and 2007, and US net liabilities would double (again to about 40% of GDP). In both cases, this would be unprecedented by the countries' own historical standards. Indeed, even the existing net asset position of these two countries are difficult to explain on the basis of underlying fundamentals. [...] Large external adjustments would be needed to stabilize net foreign asset positions as a ratio to GDP. [...] Past experience indicates that significant reductions in external deficits generally occur through a combination of a slowdowns in output growth, which lowers demand relative to output through its effect on consumption an investment, and a depreciation of the real exchange rate, which switches spending from foreign to domestic goods. The time over which external adjustment occurs is also important . An extended period allows more time for countries to adjust their production structure, thereby reducing the size of the needed exchange rate adjustment (Obstfeld and Rogoff, 2000). [...] The historical analysis suggests the likelihood of a reduction in external imbalances over the next few years, involving slowing output growth in the deficit countries and a depreciation of their currencies a year or so before these reductions are seen. Given the size of the deficit countries in the global economy, this in turn implies—all else being equal— appreciations of the currencies of the surplus countries. History also suggests that a rapid and potentially more disruptive adjustment is a significant possibility.
Evolution of Global Imbalances [...] There is now a gap of some 2.5% of global GDP between the current account surpluses of continental Europe and east Asia (dominated by the euro area and Japan, respectively) and the deficit countries, dominated by the United States. [...] In short, the expansion in the imbalances in the deficit countries in the 1990s reflected faster growth combined with financial excesses involving buoyant expectations about future economic prospects associated with the IT revolution. [...] Large external surpluses and deficits have also led to increasing divergences in net foreign asset positions across countries, with Japan building up net assets and the United States, net liabilities (Figure 2.3). Indeed, the foreign asset position in both countries is approaching or beyond their own historical records. [...] Are the Imbalances Viable and How Might They Adjust? [...] in the absence of revaluations of asset prices, the current forecasts implies that Japanese net assets as a ratio to GDP would rise by about one-third (to about 40% of GDP) between now and 2007, and US net liabilities would double (again to about 40% of GDP). In both cases, this would be unprecedented by the countries' own historical standards. Indeed, even the existing net asset position of these two countries are difficult to explain on the basis of underlying fundamentals. [...] Large external adjustments would be needed to stabilize net foreign asset positions as a ratio to GDP. [...] Past experience indicates that significant reductions in external deficits generally occur through a combination of a slowdowns in output growth, which lowers demand relative to output through its effect on consumption an investment, and a depreciation of the real exchange rate, which switches spending from foreign to domestic goods. The time over which external adjustment occurs is also important . An extended period allows more time for countries to adjust their production structure, thereby reducing the size of the needed exchange rate adjustment (Obstfeld and Rogoff, 2000). [...] The historical analysis suggests the likelihood of a reduction in external imbalances over the next few years, involving slowing output growth in the deficit countries and a depreciation of their currencies a year or so before these reductions are seen. Given the size of the deficit countries in the global economy, this in turn implies—all else being equal— appreciations of the currencies of the surplus countries. History also suggests that a rapid and potentially more disruptive adjustment is a significant possibility.
