"The United States' Exorbitant Privilege"

Behold, from Mr Setser:

How much “capital flow reversal” insurance should the world offer?

Excerpt:

......it is still striking that the emerging world did more to help the US avoid adjustment from say early 2006 to mid 2008 than the US, EU and Japan seem likely to do (through the IMF and World Bank as well as bilaterally) to help the emerging world avoid adjustment now, even with the recent expansion of the IMF.***

Call it part of the United States exorbitant privilege. So long as key emerging economies peg to the dollar and allow their reserves to rise when private demand for their financial assets rises, the US gets more protection from a sudden reversal in capital flows than other countries with large deficits.

But also call it part of a broad system that has resulted in a persistent uphill flow of capital — and thus part of a broad system that led the US to run larger external deficits over the past few years than really were healthy.

That broad system is unsustainable, and in my view essentially ended in August 2007.

Thus far, not too terribly much has taken place to replace it. (There's a continuing hope that all might be well post-Great Recession) Not. But replace the existing system we must. For my money, it begins here in the US with an actual solution to the banking crisis (break up Citi and BoA, break the grip of Oligarchs etc...), moves next to an awareness that US 'consumers' are no longer such (Obama very much understands this), and then on to getting serious with China/Voldemort (and other large exporters) about over-capacity and currency manipulation....