So the basic idea is that, stripped down, there were some very large shifts in the world economy
in the late 1990s and early 2000s. At the end of which just to mention, the most important of
which were the Asian financial crises and the rise of China, and the policies pursued by China
the emerging world became essentially a huge capital exporter in aggregate, and pursued
policies for a long time designed to reinforce those capital exports. Huge reserve accumulations,
deliberate undervaluation in real terms of their currencies relative to what I think would have
happened under floating rates. And they started to accumulate huge surpluses.
There were a number of other developed countries Germany and Japan in different ways
pursuing quite similar policies, to some extent accidentally as a result of ageing, or as a result of
collapses in the desire for investment in their corporate sector, which also generated huge
excess savings.
And this is something that I develop more in my current book rather than in that earlier book: I
have become more aware of the shifts in income distribution within our countries and the effects
they have had. But the net effect of this was huge capital exports and a huge shift in the balance
between savings and investment, shown in the real interest rate from the late 1990s onwards.
Now, the world economy has to balance. Demand and supply must balance, demand must
equal supply. The question is at what level of activity.
My argument is that in the world system that we actually have this is slightly simplified the
Federal Reserve acts as the global balancer. It effectively balances demand and supply,
because when there is ever a huge net export of capital from the rest of the world, it almost
automatically takes the form of excess demand for US liabilities or US assets if you like, or
claims on the US to be most precise. Because it's the safest place. It's got the biggest capital
markets, where everybody wants to put their money looking for decent, safe returns.
