I agree with your premise that it's important that the Chinese begin to appreciate further. 

Let me just raise a couple of issues which I guess I would call tactical issues, without addressing any specific legislative proposal.

The first is that the currency, while an important issue, is probably in itself not going to solve the trade imbalance problem. There are fundamental saving/investment imbalances, both in the United States and abroad, which need to be changed in order to make real progress on the trade balance.

And in particular we have emphasized with the Chinese the importance of structural changes in their economy, such as increased safety net and improved financial system, that would increase the share of their output going to consumers and being consumed at home. And the combination of currency appreciation and this other set of measures is really what's needed to begin to move things in the right direction.

So I would urge you to broaden your focus just a bit, beyond the currency, to talk about the savings and investment balances that need to be adjusted in both the United States and in China.

Third, liquidity in U.S. markets also increased significantly in recent years due to increased international capital flows. These flows to the United States from global investors lead to higher liquidity by increasing capital available for investment and facilitating greater transfer and insurability of risk. A recent report by McKinsey & Company estimated that aggregate international capital flows amounted to $6 trillion in 2005--almost triple the volume a decade earlier--and that one-quarter of the worldwide volume flowed through the United States.

The most likely scenario is for a slow decline in the net saving rate by the rest of the world that would induce a gradual contraction in the U.S. current account deficit. This probably would not have a major impact on U.S. price pressures or growth, so there is little reason to think that monetary policy would need to react significantly.

If one were confident that observed imbalances simply reflected a more efficient allocation of the world’s stock of saving to its most productive uses, that relative prices adjust freely in response to changing fundamentals and that economies are flexible and agile in adapting to those changes, then we might also reasonably expect these imbalances to resolve themselves through smooth and gradual adjustments in relative prices and flows of goods and services. These conditions do not fully exist today. We do not yet live in a world of perfect capital mobility, one in which savings move across borders to their most productive use without constraint in the form of capital controls or without distortions affecting the behavior of private actors. Recognizing this is important to understanding both why the U.S. imbalance has grown as large as it has and, perhaps, more importantly why it has been financed with such apparent ease despite obvious concerns about its sustainability...The anomaly is that these imbalances have persisted on a seemingly unsustainable path with relatively low interest rates and very little evidence of rising risk premia.

For global growth to be sustained at a reasonably strong pace during this period of adjustment, the desirable increase in U.S. savings, and the necessary slowing in U.S. domestic demand growth relative to growth of U.S. output, would have to be complemented by stronger domestic demand growth outside the United States, absorbing a larger share of national savings. Exchange rate regimes, where they are currently closely tied to the dollar, will have to become more flexible, allowing exchange rates to adjust in response to changing fundamentals. Reforms to financial systems and to social safety nets over time would help reduce the need for exceptionally high levels of domestic saving we see in many countries. The global nature of these requirements does not imply that the United States can put the principal burden for adjustment on others

The global savings glut idea attempts to point out that the current account deficit of the United States is not simply or entirely a product of U.S. economic policies. It is a global phenomenon created by global forces. Over the last 10 years or so the amount of savings being done around the world has exceeded desired investment in those same countries for various reasons, including the aging of some industrial economies, the oil revenues of crude producers, and most importantly, the fact that emerging market economies over the last 10 years have gone from being significant borrowers in international capital markets to large lenders, to having large current account surpluses. As a result, there's been enormous amounts of capital dumped into international capital markets, which helps to account for the fact that global interest rates are at record lows or at least at very low levels. The inflows of that capital into the United States, which is an attractive destination for this capital, and the resulting impact on asset price in the United States is, in my view, part of the reason why Americans have increased their consumption and reduced their savings, which has resulted in this current account deficit. Now...I don't view the current account deficit as desirable. I think there's a number of reasons to try and end it. But in order to end it or at least to wind it down over a period of time, it's going to require action both within the United States and also within our trading partners. On the part of the United States, we need to increase our own savings relative to investment. With respect to our trading partners, there needs to be, first, increased reliance on flexible exchange rates, as we've already discussed, and also more willingness on the part of our trading partners to rely on domestic spending, domestic government purchases or consumption, to drive their economies, as opposed purely to an export-led strategy.

The trend reduction worldwide in long-term yields surely reflects an excess of intended saving over intended investment.  This configuration is equivalent to an excess of the supply of funds relative to the demand for investment...As best we can judge, both high levels of intended saving and low levels of intended investment combined to lower real long-term interest rates over the past decade.

The economic forces driving the global saving-investment balance have been becoming manifest over the past decade, so the steepness of the recent decline in long-term yields suggests that something more may have been at work over the past year. According to estimates prepared by the staff of the Federal Reserve Board, a significant portion of the more recent decline appears to have resulted from a fall in term premiums. Such estimates are subject to considerable uncertainty; nevertheless, they suggest that a perceived increase in economic stability in recent years has encouraged risk-takers to reach out to more-distant time horizons.

Since the mid-1990s, a significant increase in the share of world gross domestic product (GDP) produced by economies with persistently above-average saving--prominently the emerging economies of Asia--has put upward pressure on world saving.  These pressures have been supplemented by shifts in income toward the oil-exporting countries, which more recently have built surpluses because of steep increases in oil prices.

Our international asset position can't drift indefinitely. Having said that, it has a lot of room to drift. I think Gov. Bernanke's argument for elevated global savings flows are keeping down real interest rates and are driving American consumption.

I think for the emerging Asian economies, for them the big lesson I would take away is that buffer stocks of external reserves seem pretty useful and that might be what's driving these savings flows.

This [global savings glut] factor does not solve the term structure puzzle, for two important reasons. First, as noted, the glut has been in force throughout this decade, while the term-structure puzzle refers to the period since early 2004. Second, the glut is a source of downward pressure on real interest rates at all maturities since 2001, while the term structure puzzle instead refers to the recent flat trend of the long rate despite a significant increase in the short rate.

Some of the largest industrial economies in the world--Japan and the euro area--have been running current account surpluses while experiencing very subdued growth...By depressing perceived rates of return abroad, the weakness in foreign demand explains a considerable portion of the run-up in the dollar

I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today...The global saving glut has been a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders.