Long-time correspondent S.B. recently recommended the book The Dollar Crisis: Causes, Consequences, Cures by Richard Duncan. Of the many intriguing dollar-trade topics, let's consider this one:

As we have already seen, the US Current Account deficits are causing an explosion of the global money supply which, in turn, has been responsible for the rise of a series of bubble economies that leave systemic banking crises and deflation behind when they inevitably implode.

In other words, the United States’ Current Account deficit, by flooding the world with Dollar liquidity, is creating (in fact, has already created) a global credit bubble of enormous proportions. It is only a matter of time before something will have to give.

Either government finances will snap under the strain of bailing out failed banking systems, or deflationary pressure stemming from global excess capacity will undermine corporate profitability to such an extent that unemployment will soar, causing a backlash against free trade, or the rest of the world will eventually lose faith in the ability of the United States to finance its ever growing indebtedness and, in a panic, dump their US Dollar-denominated debt instruments, making it impossible to finance further deficits.

One way or the other, this global credit bubble will—like every credit bubble before it— come unwound, the Dollar will lose much of its value, and the US Current Account deficit will correct.

Unhappily, the correction of the US Current Account deficit will have extraordinarily damaging impact on the global economy. The world economy has grown dependent on exporting to the United States. At 500 billion Dollars, the US Current Account deficit is the equivalent of almost 2% of global GDP—and, that’s before any multiplier effect is taken into consideration. (NOTE: this was written in 2003; the deficit is now $866 billion.)

The inability of the United States to indefinitely expand its indebtedness to the rest of the world at the current rate of a Million Dollars a minute means that Asia’s era of export led growth will soon be coming to a close.

If policy makers don’t come up with a new source of global aggregate demand to replace that presently created by the US Current Account deficit then the global economy will not be able to avoid a severe and protracted deflationary slump.

This, therefore, is the point I want to stress: trade imbalances of the magnitude experienced over the last 25 years cause unsustainable economic bubbles in the surplus countries which subsequently implode, leaving behind wrecked banking systems, heavily indebted governments, excess capacity and deflation.