The worst-case scenario is much less pretty: Foreign investors, losing confidence in the U.S. dollar's stability and increasingly doubtful that the American economy can absorb the current account imbalance, yank money out of U.S. government bonds, in favour of safer harbours.

This exodus sends the dollar off a cliff. Interest rates spike higher, reflecting plunging demand for U.S.-dollar debt and the rising risk perceived by investors.

Stock markets tumble, as investors flee U.S. stocks to avoid the currency losses tied to U.S.-dollar-denominated stock prices, as well as the rising interest rates that imply less competitive returns at current stock valuations and the drag on corporate profits from rising credit costs. Corporate and consumer spending slump under the weight of rising interest rates and import prices. The U.S. economy slows to a recession, dragging the rest of the world down with it. Policy makers stand by helplessly; if the Federal Reserve Board were to cut interest rates to stimulate the economy, it would only put more downward pressure on the dollar.

Far-fetched? Maybe. Martin Barnes, who described just such a chain of events in his independent research report The Bank Credit Analyst, acknowledges that the scenario — he called it his "ugly" case — is "overly gloomy." But it has happened before.

Many people have been talking seriously about major meltdowns in the system due to US debt, but of course many countries have a major stake in preventing them. Remember how many times various Cassandras said the tech bubble was going to burst - and it didn't - until nobody believed the warnings? Then it burst. Something major may happen as soon as everyone stops taking the periodic strident warnings seriously. It might well be more serious than the article above suggests. I keep meaning to write about it, but I don't know what to say, I don't know more than anybody else. It seems almost a game of chicken, with the United States trying to force other nations to allow the value of the dollar to fall by spending more and more of them, while other nations try to force us to accept a strong dollar and cut our spending to support it. It is a battle the United States cannot lose - which will start a war they cannot win. It is painless for Bush to spend and cut taxes, and buying dollars gets more and more expensive for everyone else. Supposedly the dollar will go down just enough to increase increase our exports and decrease our imports, but that seems less and less likely. The only reason all these nations spend money supporting the dollar is to export, and when they stop trying they may well stop.

I've been thinking about the oddities of this situation. All these countries have manufacturing capacity - and people who need things (especially China). Yet the world economy is structured so that they would rather trade goods for ledger deposits of dollars despite open concern about dollar denominated debt than give these goods to their own people. Of course, the redistributive economies that came before didn't work either, but there has got to be a way to do better than this.

What we need is to rethink the world economy from the ground up.