The managing director of the International Monetary Fund, Rodrigo de Rato, said on Monday that the dollar would have to fall and the United States would have to take on its growing indebtedness to avoid a threat to the world economy some time in the future.
In an address at the Council on Foreign Relations in New York, de Rato did not spare rich or poor nations in his diagnosis of the world economy and said it was a good time for all countries to begin cutting their deficits and making needed changes.
He noted that with the United States' deficit remaining well over 4 percent of its gross domestic product for years to come, "some correction in the value of currencies will make sense from the point of view of fundamentals."
"We believe such a large imbalance is a risk not only for the United States economy, but for the world economy," he said.
Fortunately, with the global economy in a growth spurt, developing nations can put in place needed changes and wealthy nations can begin to balance their books, he said. The United States should begin cutting its budget deficit, projected at $420-billion this year, as well as its current account deficit, which hit a record $166.2-billion in the last quarter.
Taken together, economists warn, these deficits could set off a sudden fall in the dollar and reverse the global recovery, though others disagree, saying that the two factors will instead quietly erode American dominance of the world economy.
The United States was not the only wealthy country to be singled out for the threat it posed to the global economy.
In his speech made in advance of next week's annual meeting of the IMF and the World Bank, de Rato said that Europe and Japan also shared some of the responsibility for the U.S. deficit because of their failure to expand their sluggish economies fast enough.
He said that "the lack of growth in Europe means greater pressure on the U.S. domestic market" to bear the burden for the recovery and that although Japan's economy was now much better than in the past decade it still "has to play its role."
Many economists, however, cite the overvaluation of the dollar in international currency markets, especially in relation to China and Japan, as a reason for the growing U.S. deficit.
De Rato said on Monday that he had told the Chinese government that it should move to a more flexible exchange rate "right now."
American manufacturers and labor unions recently petitioned the Bush administration to sue China at the World Trade Organization for keeping the value of its currency fixed against the dollar.
They said they had asked for this unorthodox remedy because they had lost faith that the IMF, which normally handles international disputes on currency, would ever persuade China to increase the value of its currency.
The administration denied the petition.
In the view of many economists, a Chinese move toward a more flexible exchange rate would increase the value of the Chinese currency against the dollar and relieve some of the pressure on the U.S. trade deficit.
De Rato, the former Spanish finance minister who is credited with the expansion of that economy, said that developing countries needed to improve their domestic policies and practice good governance if they were to benefit from programs to relieve their indebtedness.
He also said, however, that forgiving the debts of these poor nations was not enough; that wealthy countries needed to increase foreign aid and open their markets to greater trade if developing nations were to sustain their growth.
De Rato promised to speak up about problems before they wreak havoc in the world economy.