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Economist, April 6th 2005
AMERICA has been warned many times in recent years that its profligate spending is dangerous, for itself and for the world economy. So far, however, Americans have ignored such doom-mongering, gleefully driving their current-account and budget deficits to record levels. Now the World Bank and the International Monetary Fund (IMF) seem to be trying to stage an intervention. This week, both have come out with reports on the global financial situation—and both reports give warning that America’s fiscal irresponsibility poses serious risks to the world economy.
...both make it pointedly clear that America’s copious spending is a real, and growing, problem for the rest of the world...
America is mortgaging its future to pay for current spending...
The World Bank estimates that roughly 70% of global foreign reserves are now in dollars. That growing portfolio of dollar assets is vulnerable to currency correction. This is not such a problem if the dollar declines gently, but an abrupt change in its value could spell trouble, as central banks find themselves with gaping holes in their portfolios...
But the central banks that are buying up all this paper, particularly Asian ones, are trapped in something of a vicious circle...
Central banks have another problem: many are reaching the limits of their ability to “sterilise” their currency transactions. In order to keep their exchange-rate operations from causing inflation at home (the natural result of keeping one’s currency undervalued)
Originally posted by Blobber
What I meant is that we should not panick- we must be cautious with the US trade deficit, but it's useless if everyone panicks and is selling dollars. As The Economist article has written, a steady decline of the dollar is good, a sudden downfall is bad.
And regarding your own thread (I am taking the opportunity to reply here), aye I know - I didn't mean to imply that you thought there is only an housing bubble
I am by no means an expert on financial matters and the economy but i know what blobber means, its all about confidence in the system.