The "exorbitant privilege" of the US
Davos: What's going to happen first - sensible US fiscal policy, or a global revolt against the dollar? In all my discussions about the global economy so far here in Davos, that's the question we keep coming back to.
In my earlier post I spoke about the "new economic reality". The first thing you notice about this new landscape is that the successful developing countries are doing much better than the old, developed ones. The second thing you notice is the extraordinary fiscal position of the US.
America's exceptional approach to the public finances comes out starkly in today's new budget forecasts from the Congressional Budget Office. These show the federal deficit rising to nearly $1.5 trillion in 2011, the highest on record. At 9.8% of GDP, it will be only very slightly higher than it was in the depths of the financial crisis, in 2009.
That increase is entirely due to the package of tax cuts agreed last month. There is a coherent case for fiscal stimulus in the US in 2011. But, as the IMF commented on Monday, when it comes to stimulating the economy, the tax cut deal agreed with Congress does not provide much bang for the buck. And it involved a lot of bucks. The CBO says the package will add $858bn to federal borrowing over time.
In theory, US politicians are committed to getting the deficit under control. But as I noted the other day, they have a funny way of showing it. In his State of the Union address this week, President Obama repeated his commitment to eliminating the deficit, outside interest payments. But the concrete spending cuts he suggested to help reach that target will reduce borrowing by a measly $40bn a year.
No-one here at Davos was expecting to hear anything very different - from the President or Congress. The rule is that America gets a free pass to run larger deficits, for longer, than anybody else. Who knows, with the likes of China growing so fast, Asian and other emerging market demand for treasury bonds might even grow faster than Washington's ability to print them.
But you have to wonder - and everyone I speak to in Davos is wondering - how long America's "exorbitant privilege" is going to last.
The only other country to have had this status - and lost it - is the UK. It took several decades, and two punishingly expensive wars, for the world to tire of holding sterling. But when they did, it changed British economic policy making forever. Indeed, we are still seeing the consequences today. Rightly or wrongly, the British government believes it cannot risk borrowing a lot more from international markets. The Americans know they have a lot more leeway.
They will have it for some time yet. But the lesson of sterling's rise and fall is that if you run current account deficits long enough, and depreciate your currency far enough, the world will eventually stop giving you the benefit of the doubt. The biggest difference between Britain in 1945 and America now is that back then, there was a ready replacement for sterling, in the form of the dollar.
The renmimbi can't replace the dollar any time soon - neither China's government nor its financial system are ready for what that would entail. Heaven knows, the euro is in no fit state to replace it either.
But looking at the way the global economy is shifting in China's favour, many I've spoken to here think the emergence of the renmimbi as a serious alternative to the greenback is only matter of time. If the past few years are any guide, this supposedly long-term change might well happen faster than we think.
To return to where I began - the question is whether the US can stop borrowing dollars before the world stops wanting to buy them.