Dr. Boudreaux holds the position that it is spending by the government (government deficit), not the trade imbalance, that is the only real worry. I agree that huge deficits need to be addressed and the only real way is cutting government spending. However, that does not address the issue of the huge current account deficit which is a result of the U.S. importing tangible goods in exchange for dollars that have less and less credibility throughout the world.
PARIS, April 6 (Reuters) - Accumulation of dollar reserves by some Asian countries could spark a systemic foreign exchange crisis, the chief economist of the World Bank said in an interview to be published on Thursday.
Francois Bourguignon told the Les Echos newspaper it was too early to talk of a speculative bubble but that the United States had to cut its deficits to head off a crisis. The paper released the text of the interview ahead of publication.
"For the moment I would not speak of a speculative bubble but of the danger of a systemic crisis linked to the accumulation of foreign exchange reserves," Bourguignon told the paper.
"Some countries, particularly Asian ones, have no interest in the parities of major currencies being modified. As a result, they are financing the enormous American current account deficit.
"Today, the danger is that some dealers are starting to think they must change the rules of the game, play dollar depreciation and move towards the yen and the euro. That would confront us with a real systemic risk."
Cutting the U.S. deficit was key, Bourguignon said. The World Bank foresaw an orderly adjustment with the United States announcing a progressive reduction in its budget deficit accompanied by interest rate rises.
"Too drastic a programme would plunge the United States into recession," he said.
Recent pronouncements by Alan Greenspan, chairman of the U.S. Federal Reserve, suggested things were changing, he said, but "we are at the mercy of the nervousness of market dealers.
"Today, no catastrophe is anticipated in the coming six to nine months. So I am not yet totally pessimistic," Bourguignon added.
Here it is in a nutshell:
Our government is in debt to its scalp (we are the government) and we have less and less in the way of tangible goods that the rest of the world wants. Where is our part of the value equation?