I have completed grading the final and will try to get the final grades to the registrar by Friday. If you are curious about what I was looking for in the essay, keep reading.
Here, in outline form, is what I was looking for in the essay.
1. All global current account imbalances reflect underlying Savings-Investment imbalances.
2. All global imbalances are financed via the deficit (borrowing) country issuing promises to pay the surplus (lending) country(ies) in the future in exchange for loans in the present. The nature of what is promised, to whom, and via what intermediary (if any) varies across episodes. The US telling Germany in the 1960s, "hold dollars today and I will give you gold at $35 an oz next year" is identical in essence to Thai banks saying to Japanese commercial banks, "take my promise to pay you tomorrow what you give me today plus interest." (Though, in the US case it does not promise to pay interest too).
3. Imbalances transform into crises when lenders lose confidence in the borrower's ability to make good on its promise to repay. What triggers the crisis in any given instance will be different, but all crises are triggered by this sudden loss of confidence by lenders in the ability of borrowers to make good on their promises. Dollar overhang, therefore, is not fundamentally different than the popping of the property-market bubble in Thailand. In both cases, borrower's short term liabilities>their available liquid assets.
4. Adjustment plays out in different ways; developing country debtors get pushed into the IMF/WB process and tend to bear the largest share of the adjustment costs; advanced industrialized countries tend to negotiate and the costs do not necessarily end up falling on the debtor country. One might even argue that since 19302, the US has been pretty good at pushing the costs onto other countries ("Our currency, your problem.")
5. Implications for contemporary imbalance. Recognition that the US is vulnerable to sudden losses of confidence, recognition that if that happened it could be a bad thing, and some consideration of:
- how likely is a sudden loss of confidence in the American ability to make good on its promises?
- how governments would respond in the event of such a sudden loss of confidence--more like Latin America and Asia, or more like Bretton Woods and Plaza-to-Louvre? Obviously, there is no "right" answer here, but there are good and less good answers.