– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
By Edward Hadas
LONDON, Jan 20 (Reuters Breakingviews) – Some crises lead to the solution of an underlying problem. Mervyn King, the governor of the Bank of England, pointed out in a speech on Tuesday that the recent financial mess has as yet done nothing of the sort.
The problem in question is the accumulation of foreign currency assets. Those pile up — like a brick tower built without mortar — whenever cross-border trade is unbalanced. As of 2008, the world’s high-saving countries were adding bricks at an annual rate of $1 trillion, about 2 percent of global GDP.
The world just does not have enough safe investments to absorb all that cash. So the tower has a tendency to sway — rapid shifts of exchange rates and asset prices — and could some day collapse. The higher it gets, the more likely a great big fall.
Even after the credit crunch, the tower is still standing. The dollar has been battered, but remains the world’s reserve currency. The U.S. trade deficit has shrunk but is still unhealthily large, and once again increasing. The reforms of the financial sector currently under discussion are necessary, but will do almost nothing to make the tower more secure.