Three years ago today, the Group of 7 - the U.S. treasury secretary, the finance ministers from Japan, West Germany, Britain, France, Italy and Canada - said "the present scale of some current account balances cannot be sustained."
They were referring to the then- record $133 billion deficit that the United States was incurring that year in its international trade and services account and to Japan and West Germany's soaring surpluses.They were optimistic: "Exchange rate changes since last year are making an important contribution toward redressing these imbalances and their full effects will increasingly come through in the period ahead."
Japan and West Germany agreed to boost economic growth, the United States pledged "further progress" in paring its budget deficit.
A year later, the G-7 reaffirmed the goal to reduce payments imbalances and noted progress in "real terms," which means after adjusting for inflation. But in 1987 the U.S. payments deficit again rose to $144 billion, and Japan and West Germany's surpluses increased once more.
A year ago, the G-7 acknowledged "still large" imbalances but they saw ''trends and prospects" in the United States, Japan and West Germany, ''supportive of balance of payments adjustment requirements."
Indeed, last year the imbalances finally did diminish, at least in the United States and Japan. The West German surplus rose again.
Treasury officials now decline to speculate on the U.S. payments deficit this year. The International Monetary Fund's staff, however, projects only a $1 billion deficit reduction. West Germany's surplus will grow yet larger, it believes, though Japan's surplus will sink to $74 billion, the smallest in four years.
Overall, then, not much change.
The scary stuff is what happens in 1990.
The IMF staff, in its latest world economic report, foresees record Japanese and West German surpluses next year and a substantially larger U.S. deficit. This prospect, it cautions, "clouds the medium-term outlook." It talks of potential "disruptive market reactions" and other negative consequences.
That sort of advice may have helped spur the United States and others this week into knocking down the dollar.
But why, in the face of the dollar's significant depreciation since early 1985 and recent Japanese and West German economic booms, do big payments imbalances persist?
A few years ago, a senior U.S. Treasury aide offered a congressional panel a "rule of thumb." Each 1 percent of U.S. economic growth, he said, "raises our imports by $10 billion and each 1 percent of growth by the other countries increases U.S. exports by $5 billion."
That suggests, all else equal, that "the other countries" must grow more than twice as fast as the United States for it to pare its trade deficit. But since 1985, U.S. economic growth has slightly outpaced the average growth of other industrial nations and until this year it clearly exceeded West Germany's.
If the rule of thumb is right, the recent decline in the U.S. trade deficit largely reflects the cheaper dollar.
Since last year, however, the dollar has staged a comeback. Nobody knows exactly why - perhaps high U.S. interest rates, America's political stability and inflationary trends here and abroad.
It is this dollar revival that helps persuade the IMF's staff that payments imbalances will grow next year. And largely behind this forecast is the staff's apparent distrust of U.S. policy-makers.
The U.S. government is "targeting" a federal budget deficit of $100 billion in fiscal 1990, but the IMF staff thinks it more likely will be $145 billion. The U.S. goal of a $64 billion deficit in 1991 won't be met, the staff feels. It estimates a $158 billion deficit.
Still, not to worry, at least for now, the IMF staff says. The United States, it finds, can service its foreign debt in the "foreseeable future." But it cautions that if large U.S. payments deficits persist "over a long period" there could be "adverse market reactions."
Which takes us back to 1986. What was apparently not sustainable then is sustainable now for some undefined period. In economics, little is simple.
How serious the G-7 is about keeping the dollar from rising and about
helping cut imbalances will be known by their actions over coming months.
It may test a growing view among some economists that governments no longer can influence exchange rates much because of overwhelming world money flows.
If that's right, fasten your money belts.