This is too good for me not to link to it.
Billmon has reduced the Roubini-Setser critique of Bretton Woods 2 down to its essential elements.
The Lex column in the Financial Times covers similar ground, but in a less entertaining way.
The FT’s bottom line: the system is "structurally unstable."
Asian central bank reserves almost doubled to $1,900bn between 1999 and 2003, and swelled further in 2004, mostly in dollars. This is starting to resemble a pyramid scheme. If nobody dumps dollars, banks may avoid losses on these holdings, but if any bank tries to protect itself from possible losses by selling dollars, everyone will be hurt. ... Right now, it is hard to see any central bank breaking rank. ... However, just because everyone has a tactical interest in playing the current game now, that does not make it structurally stable in the long term. If or when the distortions linked to these pumped-up reserves unravel, the "pop" will be painful.
If any of you want to update the FT’s charts to reflect 2004 reserve accumulation by Asian central banks, my calculations suggest that Asian central banks added $535 billion to their reserves last year, pushing their overall reserves above $2400 billion ($2.4 trillion).
Net US external debt probably rose to around $3.3 trillion at the end of 2004 (with FDI valued at market rates). So the debt the US owes to Asian central banks accounts for a substantial share of the United States’ net external debt, and a not-insignificant share of the United States’ roughly $11 trillion gross external debt.