1980s were purged with relative ease. But behind the superficial similarities, America's situation now is quite different from that in the mid-1980s. the imbal are bigger; the internationa economic environment is more complex; and America's trading partners are weaker. All these factors suggest that the adjustment will be riskier and more painful Start with the size of the problem. When Mr Reagan took office, America was still the world's biggest creditor. The current-account deficit at its peak in 1987 reached 3. 4% of GDP. Mr Bush in contrast, inherited an economy that was already the world' s biggest debtor and a current account deficit that was already bigger than at its peak under Mr Reagan Besides in the 1980s the current-account deficit had been rising for only four years before the Reagan team took action It also had a clear cause: an investment boom after the 1981 recession, coupled with a collapse in saving as the budget deficit ballooned which together pushed the dollar sky-high Today's deficit, in contrast, has been rising for over a decade. It was started by an investment boom in the mid-1990s then fuelled by a dramatic drop in private savings as Americans splurged in the late 1990s; and is now being sustained by a drop in public saving. An external imbalance that has gone on for so long with so many disparate causes, is likely to be much harder to turn around oreover, today,'s larger problem must be resolved in a global economic environment that is far more fragile than that of the mid-1980s. The world economy is still working through the aftermath of a huge asset-price and investment bubble. Inflation is much lower than it was in he mid-1980s. Deflation is already a reality in several countries and hovers threateningly over many others. a drop in the dollar will put extra deflationary pressure on those countries whose currencies appreciate against it. No appetite for action Despite the world economy's greater fragility, global policymakers are showing much less appetite for 1980s-style international policy Co-ordination. Not everyone views the plaza an Louvre accords as a great success. Japan, in particular, blames the monetary easing agreed on at the time for the development of its bubble economy in the late 1980s, and hence as the root cause of today's problems. Europeans tend to see both accords as clever American tricks in which the Reagan officials pushed the burden of dealing with their past profligacy on to others Even if the Japanese and the europeans could be persuaded to overcome their suspicions of repeat it is not clear that the 1980s remedies would work this time. Co-ordination is much harder these days because of the way policy is made particularly given the rise of independent central banks. Back in the 1980s, the governments of Germany and Japan could tell their central banks what to do. Now both the Bank of Japan and the European Central Bank jealously guard their independence. Both in Japan and in the euro zone, central bankers see themselves as guardians of discipline against spendthrift politicians. That makes domestic fiscal and monetary Co-ordination difficult enough, never mind any international efforts oreover, the huge growth in capital markets has rendered currency intervention much less effective. With over $1 trillion in foreign exchange crossing borders every day, up from less than $200 billion in 1985, most economists now think that official currency intervention works at best at the margin, and then only if it is used to reinforce existing economic trends1980s were purged with relative ease. But behind the superficial similarities, America's situation now is quite different from that in the mid-1980s. The imbalances are bigger; the international economic environment is more complex; and America's trading partners are weaker. All these factors suggest that the adjustment will be riskier and more painful. Start with the size of the problem. When Mr Reagan took office, America was still the world's biggest creditor. The current-account deficit at its peak in 1987 reached 3.4% of GDP. Mr Bush, in contrast, inherited an economy that was already the world's biggest debtor, and a current￾account deficit that was already bigger than at its peak under Mr Reagan. Besides, in the 1980s the current-account deficit had been rising for only four years before the Reagan team took action. It also had a clear cause: an investment boom after the 1981 recession, coupled with a collapse in saving as the budget deficit ballooned, which together pushed the dollar sky-high. Today's deficit, in contrast, has been rising for over a decade. It was started by an investment boom in the mid-1990s; then fuelled by a dramatic drop in private savings as Americans splurged in the late 1990s; and is now being sustained by a drop in public saving. An external imbalance that has gone on for so long, with so many disparate causes, is likely to be much harder to turn around. Moreover, today's larger problem must be resolved in a global economic environment that is far more fragile than that of the mid-1980s. The world economy is still working through the aftermath of a huge asset-price and investment bubble. Inflation is much lower than it was in the mid-1980s. Deflation is already a reality in several countries, and hovers threateningly over many others. A drop in the dollar will put extra deflationary pressure on those countries whose currencies appreciate against it. No appetite for action Despite the world economy's greater fragility, global policymakers are showing much less appetite for 1980s-style international policy co-ordination. Not everyone views the Plaza and Louvre accords as a great success. Japan, in particular, blames the monetary easing agreed on at the time for the development of its bubble economy in the late 1980s, and hence as the root cause of today's problems. Europeans tend to see both accords as clever American tricks in which the Reagan officials pushed the burden of dealing with their past profligacy on to others. Even if the Japanese and the Europeans could be persuaded to overcome their suspicions of a repeat, it is not clear that the 1980s remedies would work this time. Co-ordination is much harder these days because of the way policy is made, particularly given the rise of independent central banks. Back in the 1980s, the governments of Germany and Japan could tell their central banks what to do. Now both the Bank of Japan and the European Central Bank jealously guard their independence. Both in Japan and in the euro zone, central bankers see themselves as guardians of discipline against spendthrift politicians. That makes domestic fiscal and monetary co-ordination difficult enough, never mind any international efforts. Moreover, the huge growth in capital markets has rendered currency intervention much less effective. With over $1 trillion in foreign exchange crossing borders every day, up from less than $200 billion in 1985, most economists now think that official currency intervention works at best at the margin, and then only if it is used to reinforce existing economic trends