The cure was said to be a cheaper dollar and a US recession. Now that America’s currency has dropped by about a quarter on a trade-weighted basis since early 2002, and its economy has ground to a halt, are global imbalances being resolved?

The data are encouraging. On Friday China said that its absolute trade surplus in April was flat year-on-year. The US trade deficit is also expected to have stabilised. Meanwhile, on the foreign exchange markets, the dollar has bounced, while China stated this week that it felt less pressure to revalue the renminbi further. As nervous Americans start to save (rather than borrow to buy from abroad), there are also signs that oil exporters, like Saudi Arabia, are spending more petrodollars, rather than lending them to the US.

Global imbalances are moving in the right direction. But their absolute levels are still high, as a recent International Monetary Fund analysis outlines. When the dollar last slumped, between 1985 and 1991, the US current account responded, moving from a deficit of 3 per cent of gross domestic product to a small surplus. This time round, having been at 4 per cent of GDP in 2002, the deficit sat at 5 per cent in 2007.

Why hasn’t dollar devaluation worked? The IMF partly blames oil prices (boosting US imports) and competition from low-cost countries (hurting US exports). But exceptional credit conditions played a part too: foreigners were happy to lend to the US, while Americans were happy to borrow against their houses in order to consume imported goods. As the IMF points out, fundamental metrics suggest the dollar may have to fall further to get the US deficit into sustainable territory of under 3 per cent of GDP. But with the culture of over-borrowing against overvalued assets exposed as a mug’s game, it would be a surprise if the US current account did not sharply improve from here.

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