The debt bomb

If the US does not take policy steps to reduce its need for external financing before it exhausts the world's central banks willingness to keep adding to their dollar reserves -- and if the rest of the world does not take steps to reduce its dependence on an unsustainable expansion in US domestic demand to support its own growth -- the risk of a hard landing for the US and global economy will grow. The basic outlines of a hard landing are easy to envision: a sharp fall in the value of the US dollar, a rapid increase in US long-term interest rates and a sharp fall in the price of a range of risk assets including equities and housing. The asset price adjustment would lead to a severe slowdown in the US, and the fall in US imports associated with the US slowdown and the dollar's fall would lead to a global severe economic slowdown, if not an outright recession.

Nouriel Rubini and Brad Setser, Will the Bretton Woods 2 regime unravel soon?

Readers with time to spare (55 pages) and an interest in economics, will find the essay fascinating - and worrying.

Thanks to Billmon for the tip.