The United States empire of debt : the roots of the current financial crisis

The emergence of quite severe global balances of payments disequilibria over the past two decades threatens the very foundations of the international monetary and financial system. The epicentre of this widening chasm can be readily identified in the burgeoning US current account deficits and net foreign debt, on the one hand, and the vast accumulation of current account surpluses and foreign exchange reserves by East Asia, on the other hand. Indeed, the greatest asymmetry in the global economy lies precisely in these growing imbalances across the Pacific. Two central questions will be proposed. First, what are the implications of the decline of the US dollar as the pre-eminent reserve currency and means of international payments and to what extent will the foreign holders of US dollar-denominated assets be willing to bestow the exorbitant privileges of seigniorage enjoyed by the US monetary authorities? Second, will the US itself experience a similar phase of debt-deflation to that which has gripped Japan in the 1990s as a result of the recent sub-prime crisis? The aim of this brief analysis is to provide some tentative answers to these critical questions.