The United States accommodates and offsets whatever the rest of the world throws at it because, as issuer of the world’s key currency, it suffers from no external constraint: it has been able, at least up to now, to borrow as much as it wishes in its own currency, at modest interest rates… The result is that the Federal Reserve [the US central bank] is free to pursue policies that balance the US economy and, in doing so, also balance the world’s, by absorbing the excess savings and so the surplus of goods and services, at given real exchange rates, of the rest of the world. (Wolf, 2009: 110)
What does this mean? Don’t markets work in equilibrium, going from one equilibrium to another so that rates ebb and flow constantly in search of the right price, be it in terms of foreign exchange, real assets, policy rates, and asset markets? The truth is stranger than the concocted fiction.
Whether we want to believe it or not, markets are the constructs societies make them to be. The concept that Martin Wolf touches upon above in his book, Fixing Global Finance, remains alive and well to this day. Of the books that have tried to explain this abstraction perhaps Yanis Varoufakis’s The Global Minotaur comes the closest in explaining its importance in an accessible manner. Fundamentally, it is the notion of “Surplus Recycling” which Varoufakis skillfully writes about here:
Varoufakis, Yanis, 2011, The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy (Zed Books)
Wolf, Martin, 2009, Fixing Global Finance: How to Curb Financial Crises in the 21st Century (Yale University).