This is Joe Stiglitz' presentation at the INET conference in Berlin last week. He speaks about mercantilism, and I added the tagline about the dollar.
The one point I wish to make emphatically is that only under a fiat currency trade system can these large deficits and surpluses be created, in the same manner as the debt bubbles, and asset bubbles.
This is not a new idea, of the natural balance that hard currencies present in a global trading system. But it has been forgotten, put aside in recent years. My friend Hugo Salinas-Price has written a nice presentation of those ideas in his essay Gold Standard: Protector and Generator of Jobs.
I have written on the topic many times, most recent in The Great Flaw In Free Trade Theory and other Vain Beliefs, Hoaxes, and Follies.
Under a hard currency or asset system of trade, as one country draws down its stock of gold, for example, its gold-backed currency would automatically become devalued since there would be less gold underpinning it.
Conversely, as a country built up a trade surplus, over time so much gold would flow to that country so that its currency would appreciate relative to the currencies of the debtor nations.
These changes in valuation would tend to 'balance' the trade flows naturally, and unilateral mercantilism would fail long before it threatened the stability of the international monetary system. That is not to say that exploitative trade might not exist, such as under the British Empire. These took more of a form of colonialism, a kind of mercantilism among master and vassals. But any trade imbalances between developed nations with their own currencies could only grow large with great difficulty.
A fiat currency regime allows huge imbalances not only to exist, but to grow to dangerous and unsustainable levels that threaten the very system itself.
Some of today's problems are indeed because the US is acting as the 'deficit of last resort' because it owns the world's reserve currency. This is known as Triffin's dilemma.
My thoughts about Triffin's Dilemma and the international trade structure that as a businessman I was operating within during the 1990's, especially after Bill Clinton allowed China to obtain free trade status after a large currency devaluation and without a floating currency stipulation, was that ultimately the world would be plunged into a currency war that would likely either lead to a unified financial order, possibly a triumvirate of spheres of influence, or the failure of the dollar and a radical restructuring of the global financial power structure.
So far we seem to be on track.