Yuan, Not Dollar, Is the Real Problem

From Berlin to Bangkok, governments are screaming about the falling dollar, because they can no longer rely on reckless American consumers to power their economies.

They should instead focus their anger on Beijing, which has been keeping its currency artificially low for nearly two decades with significant global ramifications.

From the late 1980s to 2007, the global economy enjoyed the Great Moderation -- low inflation and sustained growth interrupted by brief recessions. Driving global growth was an eightfold increase in the U.S. trade deficit, facilitated by a doubling of the value of the dollar against other currencies from 1989 to 2002.

Deregulation and new technologies powered U.S. growth, and Americans flush with success bought whatever the world had to sell. However, when imports substantially exceed exports, Americans must consume more than they earn producing good and services. Otherwise, demand for what they make becomes inadequate, inventories pile up, and layoffs and recession follow.

From 2003 to 2007, the U.S. trade deficit averaged $665 billion, and Americans massively borrowed from abroad to keep the U.S. economy going. They posted as collateral overvalued homes financed with shaky mortgages. When those mortgages failed, banks failed, home prices dropped and retail sales tanked. The U.S. economy plummeted into the worst recession in 70 years and dragged the rest of the world into crisis.

Imports of oil and consumer goods from China account for the lion's share of the U.S. trade deficit. Americans drive big cars powered by thirsty engines and burn too much heating oil during the winter, even as they sit on vast, untapped deposits of natural gas.