In the past decade, Asian economies like Japan have run huge trade surpluses with the US and accumulated a large amount of foreign reserves denominated in US dollars. Mr Perumal is of the opinion that as long as this continues, the US will continue to grow while savers like Japan will remain weak. This cannot be further from the truth.

If the US perpetually runs large trade deficits with the rest of the world, it will end up losing more and more of its own assets to other countries. In the words of Friedrich August von Hayek, an Austrian-British economist and the winner of the 1974 Nobel Prize in Economics, an economy in its entirety will continue to decline as long as more is being consumed than produced, and some part of consumption therefore takes place at the expense of the existing capital stock.

An economy that consumes more than it produces will eventually need to pursue inflationary monetary policies in order to reduce the future value of its current liabilities. This is precisely what has happened in the US. Inflationary policies in the form of low real interest rates have led to a falling US dollar, which has just hit an all-time low against the Euro. If this continues, Americans will find their purchasing power being eroded more and more.

The concept of using excessive spending to generate growth has worked in recent years only because Asian economies have been willing to finance trade deficits with the US. But this cannot go on indefinitely. There will come a time when Asian economies mature and domestic consumption takes over as the main generator of economic activity in Asia. When that happens, the US will find itself unable to sustain its own trade deficits and will face a currency crisis.

In order to avoid this nasty outcome, the US must pursue restrictive monetary policies and gradually increase real interest rates even if it causes pain in the short run. But knowing the nature of the US Federal Reserve to avoid bitter pills, I would not pin hopes on this happening anytime soon.

Ng E-Jay