The Instruments of Rebalancing – Stephen Roach

Global rebalancing does not occur spontaneously. It takes adjustments in economic policies and asset prices to spark a meaningful realignment in the mix of global growth. Shifts in currencies and real interest rates are the two major instruments of rebalancing. The ideal prescription for today’s lopsided US-centric world would be a combination of dollar weakness and a rise in US real interest rates. However, there is serious risk that the Fed will not execute the full-blown normalization of real interest rates that the US economy requires. If that’s the case, then there will be even greater pressure on currency adjustments to correct today’s imbalances — a development that could take world financial markets by great surprise.