But the reason for hope, even if it has not yet triumphed over experience, is that, despite the short-term political considerations that have prevented adjustment so far, the lesson of Sudoku for economists is that cooperation is better than conflict. There are potential gains for all in the longer term. That is why the UK Government put so much effort into the G20 process. It is, as they say, the only game in town. Working with our international partners will be important if we are to achieve reforms to the international monetary system. But, as one of the low-saving group of countries, we must not neglect the need for domestic policy actions. The need for a rebalancing of our economy has been apparent for some time; I spoke about it in a speech just along the coast in Plymouth ten years ago. The proportion of our domestic output that we save has fallen by around a third over the past decade, as the share of consumption, especially public consumption, has risen sharply. Looking ahead, monetary and fiscal policy together must help to bring about a switch of demand from private and public consumption to net exports and business investment as the recovery takes hold. A key element in raising the national saving rate is the elimination over time of the structural deficit in the public finances. Of course, there is a perfectly sensible debate about the appropriate timing of the withdrawal of the temporary fiscal stimulus as the economy recovers.
That might involve a recession in the deficit countries, or an acceptance by the surplus countries that, one way or another, trade imbalances must be reduced. Sudoku for economists shows that countries cannot pursue for long incompatible economic policy frameworks. The reason why continuing large deficits are not sustainable indefinitely is that for every current account deficit there is an equal net capital flow in the opposite direction. Even if those flows remain constant in size, they imply an ever increasing stock of international asset and liability positions. Today China alone has reserves of over two trillion dollars, and Japan another trillion dollars. Adding inexorably to the stock of international assets and liabilities is like adding one brick on top of another to form a tower. With skill, it can be done for a surprisingly long time. But eventually the moment comes when adding one more causes the tower to fall down. If countries do not work together to reduce the “too high to last” imbalances, a crisis of one sort or another in financial markets is only too likely. We saw that following the first oil crisis in the 1970s when the attempt to “recycle petrodollars”, as they were called, led to defaults by a number of emerging market economies and a crisis in western banks. And sudden shifts in capital flows have led to periods of remarkable volatility in exchange rates between the world’s major currencies, the dollar, yen and euro (and, before 1999, the deutschmark).