US needs a rethink as the dollar sours

       Treasuries should no longer be considered free of risk.The dollar should no longer be the key global currency.
       The US should lose its golden credit rating. Bankers and investors around the world should dump dollars. Read any economics textbook and you come to that conclusion.
       Massive government spending and money creation to rescue the nation from the Great Recession have deluged the US Treasury market with new securities - exacerbating the country's already massive debt load.
       Chronic US trade deficits have led to the accumulation of vast stores of dollars in foreign bank accounts.
       Classic economics theory says supply should overwhelm demand in both markets. Treasuries should no longer be considered free of risk. The dollar should no longer be the key global currency.
       The US has balanced its budget only five times in the past 50 years. The four straight years of surpluses, starting with 1998, now look like a statistical error.
       Total government debt at the end of 2008 was US$10.7 trillion (352 trillion baht), compared with $5.53 trillion 10 years earlier. A bit of nostalgia: In 1978,the debt was $789 billion, with a "b".
       There's little relief in sight. The latest budget deficit forecast for the new fiscal year that began yesterday is $1.4 trillion,according to the Congressional Budget Office.
       While the recession has curbed the US appetite for foreign goods, Americans still spend more overseas than they sell,as they have consistently since World War II ended in 1945. The deficit in July was $32 billion.
       Using an index based on how much business the US does with other countries, the value of the dollar has plunged about 13% since March 4.
       World Bank president Robert Zoellick,a former US trade representative, said last week that though the dollar remains the dominant global currency,"nothing's guaranteed".
       The double whammy of soaring Treasury sales and the decline of the dollar should stop governments such as China and Saudi Arabia from investing large chunks of their trade-earned dollars in US securities.
       Instead, they are buying more. Foreign investors bought 43% of the $1.41 trillion of Treasury notes and bonds issued so far this year versus 27% of the $527 billion sold in the same 2008 period.
       China more than once has said it might move away from Treasuries. Still,its purchases have increased by 10%this year and it now owns $800 billion of Treasuries, the most of any foreign country.
       During the credit crisis, investors still considered America the safest bet. They were so eager that at one point they bought short-term US paper that guaranteed them a small loss.
       As the economy begins to recover,they are buying Treasuries on the bet that inflation will stay tame even though the Federal Reserve is creating money rapidly in its recovery efforts.
       Pacific Investment Management Co's Total Return fund, the world's biggest bond fund, has increased its holding of government-related securities to 44%of its total investments, up from 27% in July. Bill Gross, the funds boss, says he views the move as protection against deflation, prices actually declining.
       Notions about inflation will change if the US and other industrialised nations can't figure out when to ease off from their massive stimulus spending. No easy task.
       To protect the safety of Treasuries and the dollar, the US government must soon get its budget under control. History suggests this is impossible.
       Hard-pressed Americans now are saving more than they did a few years ago,curbing the demand for imported goods.How long will that last?
       Textbook economics suggests that before long, Japan and other Asian nations will start converting their dollars into euro-denominated securities - or perhaps a new international currency backed by a basket of, say, euros and yen along with dollars. That would mean a significant decline for Treasuries and the dollar.The US no longer will be supreme.