reserves, in a context of relatively sluggish growth in domestic demand and, in china, saving rates higher even than the exceptional rates of fixed investment ( figure 14 ). the oil - producing countries also recorded sharply higher trade surpluses, reflecting the rise in oil prices due to the expansion of global demand. figure 14 national saving and investment of selected countries and country groups ( in percent of gdp ) national saving national saving national investment euro area united states national investment japan china national saving national investment national saving national investment oil exporters em. asia exc. china national investment national saving national saving national investment source : imf, world economic outlook, april 2009. the unsustainability of these growing current account imbalances was already an issue in the late 1990s ; afterwards, only a succession of positive variations in the value of net external financial assets contained the otherwise explosive deterioration of the us net debtor position. • a number of countries that pegged their currencies to the us dollar accumulated very substantial official reserves. the investment of these in us treasury paper contributed to lower long - term interest rates. the financing of the growing us current account deficit did not pose particular problems. up to 2000 private capital flowed to the united states as returns on financial assets were perceived as being higher than in other advanced countries, due also to faster economic growth. as a result, a self - reinforcing effect set in. the capital inflows to the united states boosted asset prices and returns, thus stimulating additional flows of capital. after the bursting of the dot. com bubble, inflows of private capital diminished substantially, but they were replaced by official flows, coming from countries with limited exchange rate flexibility. the less - than - complete substitution led to a depreciation of the us dollar and of the currencies pegged to it. the accumulation of official reserves accelerated as china and other emerging countries kept pegging their exchange rates to the dollar : of the total increase in foreign exchange reserves between 1998 and 2007 almost 70 percent is to be ascribed to emerging asian and oil / exporting economies. the large volume of investment in us treasury securities by foreign official investors contributed to drive their yields lower. the consensus view seems to be that the effect of foreign flows was to lower long - term us rates by slightly less than one percentage point. much of the fall in yields seems to have reflected a narrowing of term spreads : long rates declined significantly more than the expected future profile of short rates ( figure

currencies will only postpone the day of reckoning, while increasing the potential capital losses. this dilemma is exacerbated by the fact that no country can act in isolation, as the present and potential effects on trade flows obviously need to be taken into consideration. indeed, this is a classic case in which collective action, if feasible, would be welfareimproving. it might take the form of a cooperative agreement among surplus countries for some kind of joint “ managed currency appreciation ” vis - a - vis the dollar. the appreciation and the boost to domestic demand would have to be large enough to ensure a significant correction of imbalances. but is such collective action feasible? several practical problems would need to be overcome. even confining the discussion to asia, the countries that would have to take part in it differ in many ways : current exchange rate regimes ( hard peg, crawling peg, managed floating ) ; degree of capital account liberalisation ; stage of financial development ; trade specialisation and position in the vertically integrated asian manufacturing industry. these differences make the determination of how best to achieve the desired result extremely tricky : how large should the appreciation be, and should it be uniform across surplus countries? is it better to implement it gradually or through one large initial exchange rate realignment? and after that, should exchange rates be managed or allowed to float, to let the market determine the final size of the adjustment? these are difficult questions, to which i do not have an answer. based on europe ’ s long experience of monetary cooperation – which started in the 1970s precisely in order to address the challenges of global currency instability for a group of closely integrated countries – it is worth recalling that progress in such matters often stems from a fruitful tension between a leadership role taken by one or two countries and an unremitting effort to design arrangements and institutions that are balanced ( if not always symmetric ) and flexible enough to accommodate the needs of all participants. i don ’ t want to carry the parallel too far, as i am aware of the important differences between europe and asia, but i think that large and systemically important countries like china and japan have a responsibility to exert leadership. at the same time, as the world we live in is truly global, the passage from the current bretton woods ii non - system to a new international monetary system – more stable, better defined and regulated – must see all the countries affected, especially those of the g - 20, as full active