As the Bank of Canada has argued elsewhere, the potential costs are huge – to $ trillion in lost global output by 2015. 2 Ultimately, excessive reserve accumulation will prove futile. Structural changes in the global economy will yield important adjustments in real exchange rates.
If nominal exchange rates do not change, the adjustment will come through inflation in emerging economies and disinflation in major advanced economies. This more wrenching adjustment has already begun, raising the risk of debt deflation and deficient global demand. At a minimum, this dynamic reinforces the low-interest-rate strategies of major advanced economies and may necessitate further rounds of quantitative easing.