Is the fall of the US dollar good or bad? Both, neither. It's the wrong question. Is a fever good or bad?

Both are symptoms. The US consumes more than it produces, the difference met by foreign borrowing -- seen in the current account (c/a) deficit. The gap has grown worse since 2000, with the c/a running over 6%.

How bad is that? The saying goes: when they see a nation running a 3% c/a deficit the IMF staff prepare the bailout plan; at 3 1/2% they buy their airplane tickets. We're at 6%, a level seen only before by 3rd world states and (briefly) Ireland and Greece (during their dark days).

It is an ugly combo, a large c/a deficit and large foreign debt. Hence private lenders have largely abandoned us, with the c/a deficit funded by a small number of central banks (loosely defined as State buyers of foreign exchange). Mostly Asians (esp China) and oil exporters (mostly Saudi).

Over the past 5 years this situation has been extensively modeled by academic, ngo, commercial, and government agencies. The consensus is that it is not stable. As the debtor at the center, "rebalancing" will hurt us the most.

As kenenry1 and shek both not, economics is largely about rates of change. If this resolves itself slowly, we can pleasantly adjust. Not so good if done rapidly. As I said on my blog, "currency flight" means nothing to most Americans -- unlike those of nations that have experienced it. We too may have this interesting experience.

Shek, it is not hyperbole to say this is "potentially a regime changing event". Most major experts in the field have said so, in one form or another. The BWII system assumes accellerating debt accumulation in the US, matched with US dollar reserve accumulation by foreign central banks.

That system is ending now. Russia is opting out. The Middle East oil exports are talking about opting out, as pegging their currencies to the USD means rising inflation. And China over the past year has made it increasingly clear that their policies are changing. Cheng Siwei's comments on Nov 8 (vice chairman of the National People’s Congress in China), which hit the dollar hard, we probably another signal of this slow policy change.

In a different way, so are the creation of Soverign Wealth Funds. Instead of t-bills, our creditors want something more useful in exchange for the goods they give us.