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 At a recent speech, Bank of Canada governor David Dodge scolded the United States for its growing current-account deficit, insisting that America's economic imbalances severely threaten economic stability in the rest of the world .

According to the Canadian Broadcasting Corporation, the head of Canada's central bank went on to slam China for manipulating its currencies to create an unfair situation in which Asian savings served to finance American spending.

Dodge warned that Canadian policy makers have become increasingly concerned with "the persistent and growing current account deficit in the United States that is mirrored by large current account surpluses elsewhere, especially in Asia."

In NewsMax's May 2005 Financial Intelligence Report, noted economist John Sheehan summarized the problem, saying: "By financing our purchases of Chinese manufactured goods, the Chinese have been turning America into an economic colony of China."

And many economists share this concern.

A changing of the guard seems to be taking place. The United States, once the primary creditor to the world, has now become the planet's largest debtor. Americans are saving less than ever before, while consuming and importing more than they produce and export.

Now China has stepped in to take over as the world's major producer of consumer goods, using the earnings to buy huge amounts of U.S. debt.

Dodge disputes claims that the three major U.S. deficits – international trade, federal budget and current account – are sustainable.

"At some point, they will have to be resolved," says Dodge.

"Why? For one thing, a country's external indebtedness cannot keep growing indefinitely as a share of its GDP. Eventually, investors will begin to balk at increasing their exposure to that country, even if it is a reserve-currency country, such as the United States."

Dodge went on to say that "the buildup of foreign exchange reserves by Asian countries will, eventually, feed into domestic monetary expansion and lead to higher inflation. These imbalances will ultimately be resolved, either in an orderly, or in an abrupt, disorderly way."

A major concern is the discrepancy in national rates of saving.

Dodge says that "over the past decade or so, we have seen many countries outside the United States increase their saving by a very large amount, while at the same time, the United States has reduced its saving and has become increasingly reliant on foreign borrowing."

He added that the artificially undervalued currencies of many Asian countries would only further exacerbate what he sees as a dire global economic situation.

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2.  China Hints at Private Oil Reserve

That's the buzz in the Chinese press this weekend, following comments made by a former member of the People's Bank of China's monetary policy committee. 

According to MarketWatch, senior economist Li Yang said that it would be a "reasonable plan" to use some of the $659 million of the Chinese government's foreign exchange reserves to build a strategic pool of oil reserves to ensure that the rapidly growing economy has enough oil to keep its factories thriving.

The Chinese currency, the renminbi, is pegged to the value of the U.S. dollar, which serves to keep it artificially low. That, in turn, helps China act as retailer to the world, giving the country a huge trade surplus, which is composed of dollars.

For five years, the Chinese authorities have been trying to figure out a way to diversify out of the world's major reserve currency, and the plan to convert to a giant oil pool has once again surfaced.

According to the Asian news service AFX, Guo Shuqing, the director of the state administration of foreign exchange, hinted nearly three months ago that China might use state funds to buy imported oil.

What impact this will have remains to be seen.

The dollar has risen gradually higher in 2005 and has ceased to be the global whipping boy, as far as weak currencies go.

The recent election in France, which yielded an overwhelming "no" vote, has seen further dollar gains against the euro. So any Chinese sales of the greenback might come at a time when there is renewed demand for it.

As for oil, its price has become firm once again, following a short-lived correction in price to below $50 per barrel. Traders don't see much scope for weakness later in the year, meaning that a sustained buying spree could launch oil back into the stratosphere again. 

However, the major sticking point is still the coordination of various government departments and ministries to pull in the same direction at the same time.

Notorious Chinese red tape could just hold back this giant oil well.

Editor's Note:

• Sir John Templeton Predicts a Depression-Size Housing Bust – Find Out Why

3. Andrew Wilkinson: Interest Rate Hikes – Is an End in Sight?

June marks the anniversary of the beginning of the Federal Reserve's decision to raise interest rates.

Lifting the so-called "Fed Funds" rate from 1 to 3% means a 200% increase. However, market traders observe that while the Fed has not shot itself in the foot, its medicine has not had the desired effect.

The whole point of raising rates was to get back to normal following a weak economic period.

Easy money ensured that the consumer had ample access to credit, that the saver was lured to the mall and that corporate treasurers had access to easy funds in order to maintain growth.

During the last year, inflation has averaged 3.1%. In other words, the purchasing power of the dollar has eroded by that much during the past 12 months.

So with the Fed having set rates to 3%, the real rate of interest within the economy remains negative. The Fed needs to lift rates by at least one more quarter of a point in order to return to neutrality.

But there's no reason it should stop there.

Traditionally, a central bank will go farther by lifting rates to reflect a restrictive stance. However, while mortgage lenders might have been urging you to lock in a fixed rate on your mortgage NOW before rates climb even higher, a curious thing has happened.

Several weeks ago, we highlighted the fact that yields were actually falling across the curve. But this is no great mystery. Simply stated, while the Fed can dictate the official rate at which it lends to banks, it has little control over bond prices, which are determined by that good old-fashioned method known as "supply and demand."

While short-term rates have risen, the yield on the 10-year treasury note has fallen from 4.69% to 3.95% – and bond traders are anticipating more downturns to come.

Their rationale is based on the fact that the economy is not roaring away, stoking the fires of inflation that would require the Fed to act further.

In other words, they can see an end in sight to higher rates and they are getting close to the day when they believe the Fed will cut rates.

While that's an issue for 2006 perhaps, other nations are presently faced with precisely this prospect.

In New Zealand, Australia and the U.K. – where the central banks started raising rates well ahead of the Fed – traders have begun to anticipate lower rates to come.

This "curve inversion" (as it's commonly referred to) marks a significant turning point for an economy.

It points to a state of equilibrium, or a "Goldilocks" scenario, where things are nicely balanced – not too hot, not too cold.

We doubt that the U.S. economy is there quite yet, but one thing is for sure: the prospect of ample cheap liquidity is acting as a strong driver for corporate earnings ahead.

We can almost hear "Dow 11,000" resonating from Wall Street as we speak.

Editor's Note:

• Why OPEC Will Soon Dump the Dollar – and What That Means For You – Go Here Now

Editor's Notes: 

• Four Key Steps You Must Take NOW to Protect Your Personal Assets – Learn More
• Sir John Templeton Predicts a Depression-Size Housing Bust – Find Out Why
• Why OPEC Will Soon Dump the Dollar – and What That Means For You – Go Here Now
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