In 2007, worried about the growing size of current account imbalances, the International Monetary Fund organised multilateral consultations to see what should be done about it. There was wide agreement that the solution was conceptually straightforward. To caricature: get US consumers to spend less. Get Chinese consumers to spend more. This would be good for the US, good for China, and good for the world. (There were messages to the other players – Japan, Europe, Saudi Arabia – but they were less important.)

Good for the US: it was clear even then that the consumption binge US consumers had embarked on was unwise, and that many of them would face problems in retirement. Good for China: it was clear that much Chinese saving reflected the absence of a social safety net. Providing health and retirement insurance was desirable on its own, and would naturally lead consumers to spend more.

Good for the world: combined with an appreciation of the renminbi relative to the dollar, the changes in consumption patterns could maintain full employment in both the US and China, and decrease current account imbalances. Lower consumption in the US would be offset by higher US net exports. Higher consumption in China would be offset by lower Chinese net exports. The US current account deficit would be reduced, and the Chinese current account surplus would fall. As this orderly process of adjustment took place, and imbalances were steadily reduced, the risk of a sudden collapse of the dollar would decrease. And the world would be in much better shape.