NEW YORK (CNN/Money) - The market's worrying about the dollar ... this is a movie that Wall Street has definitely seen before.
With this weekend's communique from G-7 finance ministers meeting in Dubai pressing, in effect, for a weaker greenback, investors are again imagining ways that everything could go horribly wrong. The nightmare scenario: The dropping dollar leads to heavy selling of U.S. assets, which sends the dollar lower still -- leading to even more selling. The whole thing begins to spiral in on itself, financial markets seize up and the world is plunged into recession.
There are probably plagues of locusts and frogs in there someplace, too.
Behind all this fretting is the deep imbalance between the United States and the rest of the world. America is a nation of debtors, and its trading partners abroad are its bank. And just like a bank that's extended you a mortgage, the rest of the world owns a fair sized chunk of America. The surest sign of this? The current account deficit, the gap in the United States' trade in goods and services with the rest of the world, has swollen to 5.1 percent of gross domestic product.
That's just huge -- way bigger than it was, for example, when current-account worries were nipping at the market back in 1987 (and remember what happened then). And it just isn't sustainable, indicating a world economy out of whack. The United States needs to learn to save again, rather than spend. And the rest of the world needs to stop treating the United States like a consumer of last resort.
So something has to give, and the natural transmission point is the dollar. That falls, and the U.S. suddenly has much less buying power, and its exports are much cheaper. Unfortunately, experience from emerging markets suggests that such current account adjustments usually end with currency crashes.
But don't hide under the bed just yet. The disasters that people get really worried about are rarely the disasters that happen. With policy makers and investors all trying to prevent the nightmare scenario, the nightmare scenario isn't very likely. Financial meltdowns usually come from unexpected places.
"I'm not a big buyer of the idea that these imbalances need to cause a crash," said Brown Brothers Harriman fixed-income portfolio manager Richard Koss. "I've been hearing that for twenty years."
That doesn't mean, however, that we'll get through its currency jitters without incident. Past experience says that even when a dollar crash doesn't happen, investors worrying about it makes the market sloppy.
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