PEOPLE ARE beginning to worry about the strategic consequences of the United States' large current-account deficit. A deficit that has been sustained in no small part by the unprecedented buildup of dollar assets by central banks and sovereign wealth funds of other states. Worse, many of them are not U.S. allies. Could China and the major oil producers use their growing financial leverage to pressure the United States? Flynt Leverett, for one, does not shy away from strong claims. "The intersection of ongoing structural shifts in international energy markets with strategic trends in global financial markets poses the most profound challenge to American hegemony since the end of the Cold War," he wrote in these pages not long ago.
It is useful to draw attention to these "strategic trends" in global markets. The U.S. current-account deficit expanded significantly between 2002 and 2006 in dollar terms and relative to U.S. GDP. Yet private demand for U.S. assets from investors abroad-net of U.S. demand for foreign assets-fell after the dot-com bubble burst. The recent rise in the U.S. deficit coincided with a strong increase in central-bank reserves and an associated increase in "official"-central-bank and sovereign-wealth-fund-demand for U.S. assets, not a surge in private demand. Moreover, the set of countries now adding to their assets most rapidly overlaps heavily with the set of countries that would be left out of a concert of the world's democracies. China, the Gulf countries, Singapore and Russia will likely add about $900 billion to their central banks and sovereign funds in 2007-not counting the $100 billion or so likely increase in the foreign assets of China's state banks.
