At the same time, to ensure no disruption to the financing of the US deficits, there may be a need to consider broadening the scope of investing in US assets especially the physical assets. This is to ensure continued interest in US assets at a time when some segments of US financial assets may be less appealing than before on account of the ongoing stress in the credit market. But in the longer-term, we need to look at this process of adjustment from a global perspective and the key to the issue would be to rebuild a stronger domestic demand growth outside the US. Doing so would require stimulating public investment in infrastructure especially in Asia, as well as continuing with the financial reform to support private investment and credit expansion. And finally, greater flexibilities in prices will also go a long way in promoting an efficient resource allocation. All these points are not new, but they are a good reminder of what needs to be done. Since, our theme today is on the new trends in reserves management, let me end my remarks with a few points on reserves management and financial markets. Reserves management is essentially the flip side of reserves accumulation. In terms of the stock of reserves, notwithstanding a successful adjustment in the global imbalance, the relative importance of countries, as measured by their reserves positions, is unlikely to change significantly in a foreseeable future from the position we are in today.
The second is the policy configuration in the US, especially the easing of monetary policy that plays a crucial role in promoting expenditure of US households. And the third is financial innovation and the deepening process of financial globalization, especially in the US, that facilitates risk allocation and enhances access to credit by households. The growth of credit derivatives and sub-prime mortgages are two examples of the developments that have taken place. On the global basis, these forces have led to a widening of the US current account deficits that was matched by surpluses elsewhere. As for East Asia, in terms of the investmentsavings gap, the increase in surplus essentially reflects a fall in investment as opposed to a rise in savings as is the case for China and the oil-exporting economies. In the Thai case, a deep currency depreciation after the crisis led to a shift in profitability towards tradeables, and induced a major shift in resource allocation. Also, the damage to the banking sector compromised credit growth and the subsequent expansion of domestic demand, as the ability of the financial sector to take risk became more constrained. As a result, there was a sharp fall in domestic demand, especially private investment. And exports, by default, became the key engine for growth. Similar adjustment was observed throughout East Asia. The adjustment led to a turnaround in the external current account, a decline in external indebtedness, and a rise in international reserves, all of which helped strengthen the region’s external position.