The US may be happy living beyond its means, but if it does not correct the imbalances it is causing worldwide, crude oil and other major commodities may soon be invoiced in non-dollar currencies. The rest of the world needs to watch its step instead of waiting for the market forces to perform some miracles.
The
trade imbalances among various regions cause global
imbalances in finance. Many Asian economies as well
as oil exporting nations generate substantial surpluses
on trade account bilaterally against the US. These nations
are forced to hold these surpluses in the form of massive
forex reserves, generally denominated in the US dollars.
With
the rapid globalization during the last decade, the
problem has been further aggravated and, in fact, some
economists even maintain that it has reached crisis
proportions. Emerging economies, traditionally recipients
of foreign capital, have now become the chief suppliers
of capital that has become crucial to financing inexpensively
the large and growing current account deficit of the
US.
The
US must now attract nearly $7 bn capital every working
day from the rest of the world to finance its current
account deficit besides meeting its foreign investment
outflows.
In
case the inflows to the US decelerate or stop, the green
back is doomed to fall in value very steeply. The claim
on the US globally accounts to a whopping $12 tn. Even
a partial sell off these claims could cause dollar depreciation.
Such depreciation will naturally result in the rise
of inflation and interest rates. The very big equity
and housing markets in the US could be adversely affected,
as a consequence, the US economy may even fall or slow
down and there could be a global slowdown as well.
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