A Balanced Look at Sino-American Imbalances
"...Sustainability of public debt has replaced sustainability of private debt as the biggest threat to financial stability, and the focus of debate about the US current account has shifted from the sustainability of foreign debt to the impact of reducing the external deficit on growth and employment. The dilemma facing US policymakers is how to stimulate growth while lowering the level of total debt.
The most important way to achieve both objectives is to increase exports by strengthening US competitiveness. But where will increased competitiveness come from?
Devaluation of the dollar could improve US competitiveness in the short run, but it is not a solution. Because rapid fiscal deterioration now has investors worrying about capital losses on US government securities, devaluation would make foreigners more hesitant to finance America’s budget deficit. If foreign financing is not forthcoming, yields on US government debt will rise and the US economy will fall back into recession.
In the long run, America’s growth pattern must undergo a structural shift from reliance on debt and consumption one based on Americans vaunted capacity for creativity and innovation. Only then will America improve its competitiveness enough to allow the government to reduce both private and public debt to sustainable levels while maintaining a respectable growth rate..."