I can make two points in response.
First, economists are very good at identifying the imbalances. We're not very good at telling you when the adjustment is going to happen. But we do know that absent a coordinated plan amongst the G-7 or OECD countries to try to work out the imbalances— which was why the G-7 was created in 1985-86—market forces will take over. One day investors in Saudi Arabia and China will wake up and say they have too much American paper in their portfolios. They're not going to buy the next round of U.S. T-bills. They're not going to keep buying U.S. dollar assets. Then markets will adapt.
That's the story of 250 years of capitalism. Markets tend to go to excess, they overshoot, and then there's adjustment. It's not pretty when it happens. The most likely thing you will see is a further sharp decline in the value of the U.S. dollar. The U.S. dollar has lost 40% of its value against the euro and other major currencies over the last four years. If one day investors woke up and decided that the U.S. dollar wasn't worth as much as they thought it was, that's how the adjustment would happen. That would probably mean a recession or a sharp slowdown in the United States.
We're deeply concerned about the adjustment in the U.S. housing market that's going on right now. We're starting to see bank failures in the United States and concern about the secondary mortgage market, where there has been way too much lending against property values that have stopped rising.
So all the little warning signs are there, but no economist is going to walk in and tell you exactly when the adjustment will happen and how severe it's going to be. But you can already see the warning signs now.