a fall off in business investment. only the steady downward trend in the household saving ratio – now into negative territory – is common to both periods. this shift in the composition of the pattern of us savings and investment has coincided with a change in the composition of external financing flows into the us. the private equity inflows which dominated in the earlier period fell sharply after the stock market crash, and were replaced by inflows into corporate and especially government bonds. a significant proportion of the demand for us government securities came from the official sector, notably asian central banks, whose foreign exchange reserves have more than doubled since 2001. the fact that the us current account deficit has been funded at historically low and falling real interest rates suggests that the fall in us net savings may not have been the only – or even the main – driver of global imbalances. and while there are other possible explanations for the current low levels of global interest rates, it is certainly true that high saving relative to investment in east asia has been an important counterpart of the us current account deficit. to be more specific, the rise in saving has outpaced the growth in investment in china, while domestic investment in the rest of east asia remained stagnant after the asian crises. finally, last year ’ s doubling of oil prices in response to buoyant world demand has led to a further change in the pattern of imbalances, with the combined surpluses of oil producing countries now likely to equal half the us current account deficit, on the same scale as the combined asian surplus. how much of a threat might persistent imbalances on this scale pose to the world economy? it is, of course, conceivable that these imbalances will prove to be relatively short lived. they might be driven by underlying influences that prove to be largely temporary – for example an investment overhang in east asia, which is eventually worked off, or a purely cyclical divergence in growth rates between major regions, or a short lived spike in world oil prices. but at the moment there is little sign of this – rather the reverse. it is therefore worth reflecting whether today ’ s international monetary system ( ims ) is sufficiently robust to ensure that global imbalances can be financed, contained or corrected through the normal mechanism of market forces, without crisis ; or failing that, whether institutional arrangements exist to resolve collective action problems and conflicting priorities without damage to the wider world economy. there are three key features of today ’ s

countries in financing their savings investment imbalances, thus allowing larger imbalances to be sustained for longer. this is in principle welcome in so far as it permits more efficient adjustment over time, and smoothes the impact of economic shocks on real activity and consumption. but it also poses major new challenges for creditors and debtors, both public and private sector. the reason is that the price at which the market is willing to finance imbalances depends on investors ’ expectations about the future. this means that debtors in today ’ s world face much greater uncertainty about when credit constraints will begin to tighten. so there is always a risk that a reassessment of the economic prospects of a debtor country might lead to a rise in external financing costs. but there is considerable uncertainty about whether – and when – such a reassessment might occur. this uncertainty is particularly acute in the case of the us. its dominant position in the world economy, its huge balance sheet and its reserve currency status make it special in a number of ways. at present the us still earns positive net income from abroad despite a steady deterioration in the current account since 1991, and a slower rise in its net external indebtedness. this is not to imply that the us is immune to the basic arithmetic of debt sustainability – sooner or later persistent deficits will lead to levels of external indebtedness that represent a significant economic burden even on the us ; but it is more than usually hard to predict how long this might take. the dollar ’ s central role in the foreign exchange policies of asian emerging markets adds to the uncertainty about the deficit levels at which the us will face tighter credit constraints. since the foreign official sector – mostly asian central banks – have been financing a substantial part of the us current account deficit ( in net terms ) and now hold a substantial amount of the outstanding stock of us treasuries, private investors ’ willingness to hold dollar assets depends to some extent on their expectations of what these asian central banks will be doing. since many asian emes already have far more reserves than they need for self - insurance against financial crisis, their appetite for continued accumulation of us dollar assets will at some stage abate : indeed there has been some anecdotal evidence of this over the past year. they can already choose to diversify their reserve holdings, and the options available may become more attractive to them with the development of asian bond markets. their development strategies will also evolve. one