IT IS TIME the United States wakes up to a serious problem. The dollar is increasingly losing the position it has enjoyed for nearly half a century as the world's currency of last resort. And as that happens, the advantages we have gleaned from that status-the ability to finance our twin fiscal and trade deficits while keeping our interest rates low-will also be lost. And yet no one, particularly in Washington, seems overly concerned.
The world is awash in dollars right now, and the situation cannot last. My concern is that many in this country continue to have unrealistic views about the sustainability of the status quo. Yes, our domestic economy is doing reasonably well-we have modest but real growth, inflation is quiet, the stock market is booming. But we also have not done anything to address an out-of-control federal government budget deficit and the ongoing huge trade deficits we run up with other nations. How long will other countries continue to provide us with our credit card? Other countries may no longer be willing to provide Washington with a blank check-literally.
China's enormous trade surpluses with the United States have generated more than one trillion dollars worth of reserves. In the past, Beijing has purchased a large quantity of U.S. Treasury bonds, enabling us to finance our government's deficit spending. But the Chinese have now indicated that they will begin to pursue alternative investments with their surpluses, from purchasing companies and assets to diversifying their holdings into a basket of currencies-devoting at least $300 billion of their reserves to this purpose. One thing high on Beijing's agenda: trading their excess dollars for ownership of natural-resource assets.
